Money & Banking

RBI raises reverse repo, repo rates to curb inflation

Our Bureau Mumbai | Updated on November 12, 2017

rbi_logo_2_505272a.jpg

RBI_revised.eps

High crude oil, coal forces revision of inflation projection upwards



Rising global commodity prices, particularly oil, has forced the Reserve Bank of India (RBI) to raise the red flag again on inflation and growth in its mid-quarter monetary policy review.

The central bank on Thursday sharply revised upwards its inflation projection for March-end up to about 8 per cent from 7 per cent, even as it warned that the investment climate could get vitiated, thereby posing a threat to the current growth trajectory.

Revised rates

To tackle the rising inflationary trend, the RBI has upped the interest rate at which it injects liquidity into the banking system by 25 basis points to 6.75 per cent (repo rate) and the interest rate at which it absorbs surplus liquidity from the banking system by 25 basis points to 5.75 per cent (reverse repo rate).

This is the second time in the current fiscal that the RBI has revised its inflation projection. In January, it had upped the baseline projection for wholesale price index-based inflation for March to 7 per cent from 5.5 per cent.

High prices

The latest revision in inflation takes into account the impact of high international crude oil prices on freely-priced petroleum products, the increase in administered coal prices and pick-up in non-manufactured product prices, the central bank said in its review.

Banks are unlikely to raise deposit rates in response to the hike in key short-term rates. Deposit rates appear to have reached a peak. In order to protect their margins, banks are expected to up their lending rates by about 25 basis points. Lending rates have not moved up as much as deposit rates in the last few months.

This is the seventh time that the RBI has raised key short-term rates in the current fiscal to rein in price rise. With the latest round of increase in short-term rates, the RBI has upped the repo rate by 175 basis points and the reverse repo rate by 225 basis points in FY 2011.

Expectations

More rate hikes, adding up to 75 basis points, are in the offing in the new fiscal to stem the rising tide of inflation, say economists. The RBI, in its statement, said that it is likely to persist with the current anti-inflationary stance. Risks to inflation remain clearly on the upside as domestic fuel prices are yet to adjust fully to global prices and also due to the persistence of demand pressures emerging from non-food manufacturing.

"As far as deposit rates go, the banking system is ahead of the curve. The RBI's prodding and competition has ensured that deposit rates are nearly at a peak. But in the case of loans, the monetary transmission has not fully happened. We may hike the base rate and the benchmark prime lending rate by 25 basis points each," said Mr S. Raman, Chairman and Managing Director, Canara Bank.

From the perspective of RBI, the hike in rates is a clear signal of upward movement in interest rates, said Mr M. D. Mallya, Chairman and Managing Director, Bank of Baroda.

"As banks have increased deposit rates recently, it is unlikely that there will be an immediate hike in rates. As far as lending rates are concerned, it depends on the liquidity situation and credit growth pick-up. From April onwards credit growth would slow down. So, it is unlikely that lending rates would go up immediately," he said.

Published on March 17, 2011

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

null
This article is closed for comments.
Please Email the Editor

You May Also Like