Mumbai: The Reserve Bank of India on Tuesday hiked its key short-term lending and borrowing rates by 25 basis points each with immediate effect to rein in inflation, a move that could increase banks' commercial lending rates.
Accordingly, the short term lending rate or (repo rate) stands at 6.25 per cent and the borrowing rate (reverse repo) at 5.25 per cent.
The RBI has, however, left the cash reserve ratio or bank rate, which is the amount of cash that banks have to park with the central bank to maintain prudential norms, unchanged at 6 per cent.
"These changes will be with immediate effect," the Reserve Bank said while announcing the second quarter monetary policy review in Mumbai on Tuesday.
After announcing the latest round of rate hikes, which is the sixth since February this year, it said further rate action is relatively low in the immediate term, indicating that its consistent efforts at combating inflation has begun to bear fruits, even though this is still at a higher level.
So far, RBI has hiked the repo rate by 125 basis points (bps). One basis point is 0.01 per cent -- and the reverse repo by 175 bps, while it spiked the CRR by 100 basis points in two installments to tame inflation and to normalise the easy monetary and fiscal policies which were initiated by the RBI and government following the global financial crisis in September 2008.
The RBI is upbeat about the pace of economic acceleration and has accordingly retained its projection of GDP growth at 8.5 per cent for this fiscal.
It, however, lowered the target for inflation to 5.5 per cent by the end of this fiscal from previous projection of 6 per cent.
RBI said the monetary policy is aimed at conditioning and containing inflation perception in the 4-4.5 per cent region in line with the medium-term objective of 3 per cent inflation.
Headline inflation stands at 8.6 per cent for August, while the food inflation at an elevated 13.75 per cent for the week ended October 16.
"The monetary policy stance is aimed at containing inflation, anchoring inflationary expectations and maintaining an interest rate regime consistent with price, output and financial stability," the apex bank said.
It further said it expects these rate hikes will help "sustain the anti-inflationary thrust of recent monetary actions and outcomes in the face of persistent inflation risks and to rein in the rising inflationary expectations, which may be aggravated by the structural nature of food price increases."
However, the central bank stressed that "it does not want to disrupt growth."
The bank "aims to manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows," the bank said.
Since inflation turned on heat after turning negative for a few months towards the later part of 2009, battening it down has been the key concern of the apex bank. And these rate hikes are aimed at taming inflation, especially food prices, which the RBI feels has assumed some structural character.
On Monday in its macroeconomic and monetary developments, second quarter review of FY11, the apex bank maintained that inflation is at a "disconcertingly high level" and that the rising capital inflows and the resultant appreciation of the rupee are posing challenges to its efforts at managing the macroeconomic fundamentals without hurting economic growth which of late has been losing steam.
It can be noted that the factory production numbers (IIP) for August nosedived to a poor 5.6 per cent to hit a 15-month low, while the September core sector figures too hit an 18- month pit to a paltry 2.5 per cent.
On the continued rise in capital flows into the country, which has so far crossed $ 25 billion this year, RBI said it will intervene in the forex markets if these inflows turn volatile and lumpy.
On the rupee front, RBI noted that since September, the currency has risen by almost 6 per cent against the American dollar, while it was declining against other major international currencies like the euro, pound and the yen.
On the new bank licences, the apex bank said that the guidelines would be ready by end January 2011.
Expressing its concern over some banks still continuing to offer teaser home loans - loans which are offered at lower than the market rates to woo new customers - the apex bank said, those commercial banks will have to make an additional 2 per cent provisioning for such advances.
The banking regulator also said that it would be issuing draft guidelines on savings rate deregulation by the end of December.