Concerned at soaring prices, the Reserve Bank of India on Tuesday hiked the short-term indicative borrowing and lending rates — repo and reverse repo — and the mandatory Cash Reserve Ratio (CRR) of banks by 25 basis points each.
However, this move is unlikely to result in an immediate increase in lending rates as lenders have indicated that there is no need for revision given the projected level of resources in the system.
(Repo rate is the rate at which banks borrow money from the central bank and the reverse repo is the rate at which they park their funds with the RBI. CRR is the portion of money each bank must hold in customer deposits and notes.)
The increase in CRR, effective from April 24, will suck out Rs. 12,500 crore from the system.
Addressing a press conference here, RBI Governor D. Subbarao gave the assurance that the policy action would not hamper economic recovery, and pegged the GDP (Gross Domestic Product) growth at 8 per cent for the fiscal 2010-11. The measure would also target wholesale inflation at 5.5 per cent for 2010-11. It was now hovering close to the double-digit.
On balance, “under the assumption of a normal monsoon and sustained good performance of the industry and services sectors, for policy purposes, the Reserve Bank projects a real GDP growth for 2010-11 at 8 per cent with an upside bias.”
The developments on the inflation front were, however, worrisome, he said. “What was initially a process driven by food prices has now become more generalised. This is reflected in non-food manufactured products inflation rising from (-) 0.4 per cent in November 2009 to 4.7 in March 2010.”
Shifting policy priority to inflation from growth, the RBI Governor said three major uncertainties clouded the outlook for inflation. “First, the prospects of monsoon in 2010-11 are not yet clear. Second, crude prices continue to be volatile. Third, there is evidence of demand-side pressures building up.”
Pranab confident
Ashok Dasgupta writes from New Delhi:
Finance Minister Pranab Mukherjee exuded confidence that the hike in key policy rates by the RBI would have a “gentle impact” on tightening money supply and would help tame inflation from the existing level of close to 10 per cent.
Commenting on the steps taken by the RBI to contain inflationary pressures while ensuring that the growth momentum was sustained, Mr. Mukherjee, however, maintained that inflation had already peaked and would move downward from now to lower than the 5.5-per cent level projected by the apex bank for the current fiscal.
