India's central Bk hikes key rates

M V Nair, CMD of government-owned Union Bank of India, said there was enough liquidity in the system to meet the credit demand. Yes Bank MD Rana Kapoor said as there is enough liquidity, interest rates are unlikely to firm up in the next couple of months since it is the lean business season, when credit growth generally remains sluggish.

The positive signal about the continuation of softer interest rate regime also emanated from the fact that RBI took relatively a softer stand on policy rates hike than was expected in its credit policy. With the inflation rate nearing 10%, the market was expecting RBI to raise the key rates by 0.50 percentage points. But, RBI raised both the repo rate — the rate at which RBI lends overnight funds to banks — by 25 basis points to 5.25% and reverse repo rate — the rate at which banks park their surplus funds with RBI — to 3.75%.

Besides this, RBI also increased the cash reserve ratio — the proportion of deposits that banks are required to keep with the central bank — by 25 basis points to 6%. This measure will lead to an evacuation of Rs 12,500 crore from the banking system. But this will not have much impact as the banking system has a surplus liquidity of over Rs 50,000 crore.

RBI governor D Subbarao said that the stance of monetary policy is intended to anchor inflationary expectations while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures. The central bank has pegged the annual inflation based on whole sale price index for March 2011 at 5.5%.

The rate hike will gently tighten money supply and help moderate inflation — which is hovering close to 10%, FM Pranab Mukherjee said. He, however, felt that inflation has peaked and would begin falling and be lower than the 5.5% projected by RBI for this fiscal. “These policies should have a gentle impact in tightening money in the economy and should dampen further inflationary pressures,” he said.