Implications in credit policy as RBI hikes rate.

Guards Also Affected By This Move…
This credit policy review was in line with market expectations. The Reserve Bank of India (RBI) has raised the repo rate by 25 bps to 8.25 percent, and the reverse repo rate also by 25 bps to 7.25 percent, to arrest the rising inflation rate. The cash reserve ratio (CRR) was left unchanged at six percent.

The RBI raised the key lending rates for the 12th consecutive time in 18 months to 8.25 percent. According to the RBI, the annual inflation rate surged to 9.78 percent for the month of August – the highest in over a year – driven by rising prices of food and manufactured products. The latest inflation number indicated the need for the continued tightening. Current global and domestic factors led to the continuing anti-inflation stance.

The repo rate is the rate at which banks borrow money from the RBI. When the repo rate increases, borrowing from the RBI becomes more expensive. The RBI raised its repo rate, at which it lends to commercial banks, by 0.25 basis points to 8.25 percent and increased the reverse repo rate, the rate it pays banks for deposits, to 7.25 percent.

This move is different from what other central banks are doing. The European Central Bank, Bank of England, and Swedish Central Bank continued to hold rates steady at reviews last week, amidst easing inflationary pressures in the Euro zone and concerns of weakening growth prospects. Some Asian central banks, including Malaysia’s and South Korea’s , paused in their fight against inflation, while Brazil recently cut interest rates.

Each successive credit policy review has been tough for the RBI. The unfavourable micro and macroeconomic indicators make the RBI’s job unenviable. Considering the present situation , analysts were expecting a rate increase of 25 basis points. It had to take a call on interest rates – whether to raise them further in the face of continuing inflationary pressures or pause temporarily based on the latest disappointing factory output data.

The RBI, in its last review meet in July, raised the repo rate by 50 bps to eight percent and the reverse repo rate by 50 bps to seven percent. The apex bank has hiked the key policy rates 11 times since March 2010 to curb inflation, which has been hovering above the nine percent mark since December last year.

There were concerns of growth slipping below the seven percent mark in 2011-12 . There are negative developments such as the sovereign debt crisis in Europe, concerns of a US slowdown, lower-thanexpected July 2011 IIP growth of 3.3 percent as compared to 8.8 percent in June 2011 and 9.9 percent in July 2010. Despite all efforts, inflation has not abated.

Most analysts felt the central bank may tighten the monetary policy further considering the August inflation number , which came stronger than expected. There is significant global turbulence right now. The slowing pace of economic growth and the worsening global economic outlook were major considerations.

P.S:- In Light Of What is Happening I Think D. Subbarao is not Killing a India’s growth but giving it a Stone Platform for Development in the future.

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