The Hindu Business Line : RBI applies the squeeze

Mumbai, July 29 The Reserve Bank of India on Tuesday bared its resolve to take the ‘inflation bull’ by the horns — even if this meant an additional burden on corporate and individual borrowers.

In a stern attempt to bring down inflation levels from 13-year highs, the central bank sharply raised its key interest rate today, which is expected to trigger across-the-board hike in bank lending rates, including corporate, home and consumer loans.

In its quarterly review of monetary policy, the central bank marked up Repo — the rate at which the RBI lends funds to banks — by 50 basis points to 9 per cent, the highest in seven years, and the Cash Reserve Ratio by 25 basis points to 9 per cent.

The dose of the hike appears to be much higher than what the market was expecting, with bond prices and bank stocks falling sharply in the immediate aftermath of the announcement.

While the hike in repo will be with immediate effect, the increase in CRR, which is expected to suck out about Rs 9,000 crore from the system, will be effective from the fortnight beginning August 30, 2008.

This is the third hike in CRR as well as repo in the current fiscal.

With this hawkish measure, the RBI hopes to bring down inflation to 7 per cent by March 2009 from around 11-12 per cent at present.

“Inflation will continue at the current level for the entire second quarter and up to the first part of the third quarter. From the second half of third quarter, it should start moderating and from the fourth quarter we are confident that we should be able to bring it down to 7 per cent,” Dr Y.V. Reddy, RBI Governor, said.

GDP GROWTH

The central bank also marked down its GDP growth target for the current fiscal to around 8 per cent from the range of 8-8.5 per cent stated in the Annual Monetary Policy Statement of April 2008. “The economy has underlying conditions to grow at eight per cent. The current saving and investment ratio would normally assure eight per cent growth. I venture to say eight per cent plus,” Dr Reddy said.

Compared to the drop in growth rate all over the world, or our own standards, it is a very small moderation. “We continue to be the second fastest growing economy in the world. This growth is consistent with stability.”

BANKS WARNED

The banking regulator said some banks have expanded credit rapidly as compared to the industry growth, which has worsened their credit deposit ratios. This may warrant policy action to ensure stability and quality of financial intermediation. The RBI has urged banks to review their business strategies so that they are in a position to combine longer term viable financing with profitability in operation.

“A key aspect of this review should be a renewed emphasis on credit quality while pursuing greater credit penetration and financial inclusion,” the statement said.

“Banks should focus on stricter credit appraisals on a sectoral basis, monitor loans to value ratios and generally ensure the health of the credit portfolios on a durable basis without encountering undue asset-liability mismatch,” it added.

The RBI warned that if necessary, it will undertake a supervisory review of “those select banks which are over extended in terms of their credit portfolios relative to their sources of funds.”

The special liquidity window offered to oil companies to borrow foreign exchange for import of oil will be discontinued with immediate effect, Dr Reddy said.