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RBI's credit policy hikes interest rates

CNN-IBN
Sep 16, 2010 at 02:59pm IST

Mumbai: The Reserve Bank of India on Thursday increased interest rates by upto half a per cent while announcing the new credit policy. But EMIs could still take a couple of months to go up.

The central bank raised short-term borrowing rate (reverse repo) by 0.50 percentage points to five per cent and lending rate (repo) by 0.25 percentage points to six per cent.

The new rates, which come into effect immediately, were announced as part of the first scheduled mid-quarterly review of the monetary policy.

The short-term borrowing rate has been raised by 0.50 percentage points and lending rate by 0.25 percentage points.

The hike in rates will lead to a rise in cost of funds for the banks and eventually makes loans expensive, which will reduce consumption.

The credit policy says that inflation still remains a cause of concern. As measured by a new series the food inflation has risen to 15.10 per cent for week ending September 4.

While inflation for August was 8.5 per cent (as per the new series with 2004-05 as Base Year), food inflation was at a high of 15.10 per cent for the week ended September 4.

To check inflation, the RBI had raised these key rates by an identical margin in July.

The RBI move signalled banks to raise fixed deposit rates to compensate small savers for rising inflation just a day after the provident fund board hiked interest rates by a percentage point to 9.5 per cent,

The move would also help banks garner more funds to meet their lending needs.

While inflation was 8.5 per cent in August, the maximum return that banks are giving is 7.75 per cent on fixed deposits between three to 10 years.

The Central Board of Trustees, the highest policy making body of the Employees Provident Fund Organisation (EPFO), on Wednesday decided to raise the interest rate on provident fund deposits for 2010-11 to 9.5 per cent from 8.5 per cent.

The rate is the highest in the last five years.

Some bankers have expressed the possibility of diversion of deposits to the provident fund on account of the increase in difference between the bank fixed deposit and PF rates.

About a year ago when the FD rates were about 10 per cent and the PF rate was 8.5 per cent, unions demanded that the two be aligned.

Highlights of credit policy:

1) Ups short term lending (Repo) rate by 0.25 percentage to 6 per cent

2) Ups short-term borrowing (Reverse Repo) rate by 0.50 percentage to 5

per cent

3) Cash Reserve Ratio retained at 6 per cent

4) Bank rate retained at 6 per cent

5) Statutory Liquidity Ratio retained at 25 per cent

6) Actions aimed at containing inflation without hurting growth

7) Inflation reached plateau, says RBI

8) But it is likely at unacceptably high levels for some months

9) 40 banks raised deposit rates, 26 lending rates since July

10) Interest rates, after adjusting to inflation, in negative

11) Real interest rates should move up to encourage deposits

12) Growth remains steady, although industrial growth is

volatile

13) Monsoon to boost prospects for farm growth

14) All indicators point to sustained growth in services

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