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Tuesday, May 3, 2011

RBI credit policy: Key rates up by 50 bps

Mumbai: Warning of tough times ahead, the RBI raised the key short term lending rate and savings bank rates by 50 basis points and advised the government to hike petroleum prices as soon as possible in line with the ruling global crude prices.
In view of uncertainity prevailing in the global market, the RBI, while announcing its annual Credit Policy, has pegged the growth outlook for 2011-12 at a lower level of 8 per cent as against the government's projection of 9 per cent.
The RBI's decision to increase its lending (repo) and borrowing (reverse repo) rates by 50 basis points to 7.25 per cent and 6.25 per cent respectively will raise the cost of home, auto and other loans.
"Current elevated rate of inflation pose significant risk to future growth. Bringing them down, therefore, even at the cost of some growth in the short run should take precedence," RBI Governor D Subbarao said.
The current inflation is hovering around 9 per cent, much above the RBI's confort level of 5-6 per cent.
Commenting on the RBI policy, Finance Minister Pranab Mukherjee said "this (rate hike) was necessary to contain inflation. Inflationary pressures to the economy is still very high".
The RBI, however, gave much required relief to general depositors by increacing the savings bank rate to 4 per cent from 3.5 per cent now. This would also have a bearing on the lending rates of the banks.
Making a strong case for increasing the petroleum prices in line with the global crude prices, the RBI said that any delay would widen the fiscal deficit and counter the moderating trend in aggregate demand.
"Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, RBI believes this needs to be done as soon as possible. Otherwise, the fiscal deficit will widen and will counter the moderating trend in aggregate demand," Subbarao said.

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