The Hindu Business Line : RBI hikes reverse repo rate to absorb excess liquidity

INTEREST rates across bank loan products are set to rise. The economy was placed on alert on Thursday by the Reserve Bank of India when it marked up the reverse repo by 25 basis points to five per cent, while leaving the Bank Rate and CRR unchanged at six per cent and five per cent, respectively.

The reverse repo rate is the return banks earn on excess funds parked with the central bank against Government securities. In moving up the rate in the Annual Policy Statement for 2005-06, the RBI Governor, Dr Yaga Venugopal Reddy, intends to squeeze out loose cash from the system to stall prices chasing consumer goods. Taking the cue, financial markets went tight with yields on government securities going up. Banks that have tied their lending rates to yields in the financial markets are expected to mark up the price of retail and corporate funds while government borrowings turn costly.

The central bank has pegged the inflation rate for the current fiscal between five per cent and 5.5 per cent, subject to the growing uncertainties on the oil front, both with regard to global prices and their domestic absorption. The economic growth for 2005-06 has been put at seven per cent and is expected to be moderated by quotes in the oil crude markets, which remain tight, RBI said in its annual policy statement.

"In India, the domestic factors dominate and they all point to stability. Global factors point to risks in terms of oil prices, interest rate movements and currency imbalances. With integration of economies these risks become relevant. However, our vulnerability to global risks will also be much lesser than the rest of the world," said Dr Reddy, speaking at a press conference here today.

Among other measures in the Annual Policy statement, RBI has proposed a screen-based negotiated quote-driven system for all dealings in call/notice and term money transactions. From April 30, 2005, all members on the Negotiated Dealing System (NDS) are required to report their term money deals on the NDS platform.

Giving a hefty gift to Indian corporates, the RBI has allowed them to invest up to 200 per cent of their net worth in overseas joint ventures and wholly owned subsidiaries, under the automatic route, against the earlier limit of 100 per cent.

In view of the importance of post-harvest operations, the limit on loans to farmers through the produce marketing scheme has been raised to Rs 10 lakh under priority sector lending against Rs 5 lakh earlier. Banks will be allowed to okay corporate proposals for commodity hedging in international exchanges. Cautioning banks on the slow rate of growth of deposits, Dr Reddy observed, deposit growth was not growing at the required pace. This was okay at a time when credit growth was sluggish but not in the current scenario when non-food credit during 2004-05 recorded its second highest growth in 55 years.

"The credit growth story is good but there should be diversified lending. We have strong credit growth, which now has to be reconciled with the significant size of the government-borrowing programme. The quality of credit growth should be enabled in a way that it doesn't destabilise anything," added the RBI chief.

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