RBI warns of tough times; raise key rates by 50 basis points

Mumbai, May 3 (PTI) Warning of tough times ahead, the
RBI on Tuesday raised the key short term lending rate and
savings bank rates by 50 basis points and advised the
government to hike petroleum prices as soon as possible in
line with the ruling global crude prices.
In view of uncertainity prevailing in the global
market, the RBI, while announcing its annual Credit Policy,
has pegged the growth outlook for 2011-12 at a lower level of
8 per cent as against the government's projection of 9 per
cent.
The RBI's decision to increase its lending (repo) and
borrowing (reverse repo) rates by 50 basis points to 7.25 per
cent and 6.25 per cent respectively will raise the cost of
home, auto and other loans.
"Current elevated rate of inflation pose significant
risk to future growth. Bringing them down, therefore, even at
the cost of some growth in the short run should take
precedence," RBI Governor D Subbarao said.
The current inflation is hovering around 9 per cent,
much above the RBI's confort level of 5-6 per cent.
Commenting on the RBI policy, Finance Minister Pranab
Mukherjee said "this (rate hike) was necessary to contain
inflation. Inflationary pressures to the economy is still very
high".
The RBI, however, gave much required relief to general
depositors by increacing the savings bank rate to four per
cent from 3.5 per cent now. This would also have a bearing on
the lending rates of the banks.
Making a strong case for increasing the petroleum
prices in line with the global crude prices, the RBI said that
any delay would widen the fiscal deficit and counter the
moderating trend in aggregate demand.
"Even though an adjustment of domestic retail prices
may add to the inflation rate in the short run, RBI believes
this needs to be done as soon as possible. Otherwise, the
fiscal deficit will widen and will counter the moderating
trend in aggregate demand," Subbarao said.


Justifying the hawkish policy stance, the RBI said
"resurgence of inflation in the last quarter of last year
became a matter of concern".
Subbarao further said the recent surge in global
commodity prices are likely to continue during the course of
the year. "This suggests that higher inflation will persist,
and may get worse".
While raising the key policy rates, the RBI retained the
bank rate at 6 per cent and the Cash Reserve Ratio (CRR) also
at 6 per cent. The CRR is the portion of deposits the banks
are required to park with the RBI.
Retaining CRR at 6 per cent would ensure sufficient
liquidity in the system.
The Central Bank has pegged the March 2012 inflation at
6 per cent with an upward bias. "As regards the trajectory
over the year, inflation is expected to remain at an elevated
level in the first half of the year before gradually
moderating to 6 per cent by March 2012," it added.
The RBI also introduced a new mechanism -- Marginal
Standing Facility -- under which banks would be permitted to
borrow short term funds up to one per cent of their deposits
at 8.25 per cent.