RBI raises policy rates, FM says move desirable

Mumbai, July 2 (PTI) The Reserve Bank of India Friday
raised key short-term policy rates by 25 basis points in an
unscheduled announcement to tame doubled-digit inflation, but
bankers said this won't lead to any hike in interest rates for
now.
Welcoming the steps taken by RBI, Finance Minister Pranab
Mukherjee of India said, "(they) are desirable given that core
inflation has risen and credit situation is tight."
The increase in rates comes ahead of the July 27 policy
review by the apex bank, which feels that money supply in the
system has started easing in contrast to the crunch felt just
a fortnight ago, when corporate demand for funds shot up.
RBI's decision to increase the short-term rates at which
it lends (repo) and borrows (reverse repo) money from
commercial banks, however, may not have any immediate impact
on the interest rates which home and car loan seekers and
corporate borrowers pay, say bankers.
Mukherjee also expressed satisfaction over the decision
of the RBI to not raise the Cash Reserve Ratio (CRR), the
amount of deposits that banks are required to keep with the
central bank. "It is good that RBI has not raised CRR," he
added.
The hike in repo and reverse repo by 25 basis points to
5.50 per cent and 4 per cent, respectively, "should contain
inflation and anchor inflationary expectations going forward,
while not hurting the recovery process," said the RBI.
Wholesale prices-based inflation crossed double digits
(10.16 per cent provisionally) in May, but as per final
figures, the rate of price rise has been 11 per cent or more
since February. Food inflation eased to 12.92 per cent in the
third week of June from above 16 per cent.
Justifying its mid-course action, the RBI said, "The
developments on the inflation front, however, raise several
concerns... Food price inflation and consumer price inflation
remain at elevated levels. There has been some moderation in
food price inflation, but the price index of food articles
continues to increase."
RBI had earlier increased the repo and reverse-repo rates
by 25 basis points in April.
On the impact of the hike in key rates on interest rates,
State Bank of India (SBI) Chairman O P Bhatt said, "RBI's move
may not impact interest rate till July 27... RBI's (move will)
not impact base rate of SBI."
The bank would think of some decision only after the
monetary policy review on July 27, said the chief of SBI,
which this week pegged its base rate, the minimum lending
rate, at 7.5 per cent.
RBI's action, said ICICI Bank CEO and MD Chanda Kochhar,
"is consistent with its gradual normalisation of policy rates
towards a level consistent with the economic growth, in a
non-disruptive manner."
Although the monetary tightening steps are being
announced at a time when the banks are complaining of a
liquidity crunch arising from payment of more than Rs 1 lakh
crore towards 3G licence fees and advance taxes, the RBI said
the liquidity situation has started improving.
"Through the month of June, liquidity... remained in
deficit mode. Consequently, the call rate moved up
significantly, resulting in an effective tightening at the
short end of the yield curve. The liquidity situation has
since begun to ease," said the RBI statement. PTI JD
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