RBI raises reverse repo rate `to stabilise inflationary pressures' Bank rate, CRR left unchanged

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GDP growth estimate put at 7.5-8 per cent up from 7-7.5 per cent earlier

Dr Y. V. Reddy, RBI Governor, with Dr Rakesh Mohan, Deputy Governor, addressing a press conference in Mumbai on Tuesday. Paul Noronha
Dr Y. V. Reddy, RBI Governor, with Dr Rakesh Mohan, Deputy Governor, addressing a press conference in Mumbai on Tuesday. Paul Noronha

Our Bureau

Mumbai, Jan. 24

SIGNALLING a high interest rate regime, the Reserve Bank of India on Tuesday hiked the reverse repo rate (the rate at which the RBI absorbs excess bank funds) by 0.25 percentage points to 5.5 per cent with immediate effect.

This is the third time in the current fiscal that the central bank has hiked the reverse repo rate.

The repo rate also been raised by 0.25 percentage points to 6.5 per cent, as it is linked to the reverse repo.

The central bank has left unchanged other key rates such as the bank rate at 6 per cent and the cash reserve ratio at 5 per cent.

In view of the improved macro economic scenario, the RBI has placed its GDP growth estimates at 7.5-8 per cent, up from 7-7.5 per cent earlier.

Explaining the rationale behind hiking the reverse repo rate in its third quarter review of the Monetary Policy on Tuesday, Dr Y.V. Reddy, RBI Governor, said it was a measured policy response to stabilise inflationary pressures (particularly in view of the risk posed by rising oil price and rapid credit growth), while the economy is set to achieve an 8-per cent growth rate.

When asked why the rate hike when all indicators were positive, in the RBI's own assessment, Dr Reddy said, "We have acted now. We have to make a judgment between the downside effect of acting now and the ineffectiveness of acting later."

Though inflation has been contained at 4.2 per cent, high oil price, step-up in credit growth, movement in asset prices and growth in money supply pose further risks of potential inflationary pressures, the RBI said in its review.

"International crude prices remain a potent threat to overall price stability," it said.

While the prospects for growth have improved in recent months, it is critical to ensure that these gains are not dissipated either by inflationary pressures or by any threat to financial stability, the review said.

Defending the rate hike, Dr Rakesh Mohan, Deputy Governor, RBI, said that in view of the emerging global and domestic scenario and the related risks, "we need to prevent potential possible corrosive effect on growth."

Responding to a query on whether the RBI doubted the asset quality of banks, Dr Reddy said, "We are not saying something is wrong. But we want to make sure that nothing goes wrong ... We are telling the banks to be more cautious."

According to the RBI, between September and December, several banks raised both the lending and the deposit rates.

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(This article was published in the Business Line print edition dated January 25, 2006)
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