Home Economy Inflation forces India’s central bank to hike rates again

Inflation forces India’s central bank to hike rates again


Mumbai: Corporate and consumer loans could become dearer as India’s central bank Tuesday hiked its short-term lending rate by 50 basis points, pegged the borrowing rate 100 basis points below it and raised the interest rate on popular savings accounts.

Laying emphasis on curbing inflation over growth, the Reserve Bank of India (RBI) hiked the repurchase rate to 7.25 percent from 6.75 percent earlier, by which the reverse-repo rate gets automatically revised to 6.25 percent from 5.75 percent.

This is the ninth time in 15 months that the policy rates stand hiked.

The structural change in the monetary policy was announced by RBI Governor D. Subbarao before the chief executives of commercial banks at the RBI headquarters at Mint Street in mid-town Mumbai. “These policy decisions take immediate effect,” the governor said.

Other policy rates such as the statutory liquidity ratio and the cash reserve ration — the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities — have been left untouched.

The bank rate also remains unchanged at 6 percent.

“The Reserve Bank’s baseline inflation projections are that inflation will remain elevated, close to the March 2011 level over the first half of 2011-12, before declining,” Subbarao said.

Over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth,” he said.

“Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence,” the governor added, spelling out what guided the monetary policy stance for the current fiscal.

“The hikes in policy rates were on expected lines. But the increase in savings interest rate was a surprise. It is expected to have a marginal impact on the interest margins of banks,” said Dipen Shah, senior vice president with Kotak Securities.

“The banks may pass it on to the consumers in due course of time,” Shah, who is with the private client group with the financial services firm, said, implying that interest rate on corporate, housing, consumer and automobile loans could go up.

Reacting to the monetary policy, Finance Minister Pranab Mukherjee told reporters in New Delhi that the rate hikes were in order since it was necessary to contain inflation that had started behaving “erratically” again after showing signs of easing.

Talking to reporters in a briefing at the RBI headquarters, chief executives of banks said loans would become costlier but the quantum of the increase in interest rates on loans would depend on individual banks.

“Interest rates on short-term deposits at banks may rise,” State Bank of India Chairman Pratip Chaudhuri said.

The chief executive of India’s largest private lender ICICI Bank Chanda Kochhar too said the increase in rates would be passed on to consumers.

But industry bodies strongly opposed the latest rate hike and said tackling inflation should be done by dealing with supply side issues and curbing government expenditure.

“This is certainly a very hawkish monetary stand, one which would make the investment environment even more difficult. We are afraid that with growth slowing, as now admitted by RBI, employment targets will not be achieved and this could generate greater social pressure,” Rajiv Kumar, director general, FICCI said in a statement.

The Confederation of Indian Industry (CII) too was critical of the increase in interest rates.

“The continued monetary tightening without any movement on structural reforms to address supply side bottlenecks will have an added impact on capacity creation and expansion,” said Chandrajit Banerjee, director general, CII.

The repo rate, often referred to as the short term lending rate, is the interest charged by the central bank on borrowings by commercial banks.

The reverse repo rate, referred to as short term borrowing rate, is the rate at which the central bank borrows money from commercial banks.

The cash reserve ratio and statutory liquidity ratio determines the amounts banks have to retain in liquid assets, gold and government bonds against deposits, and together form a part of traditional instruments that help in checking liquidity in the system.