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RBI hikes key rate to check inflation

india Updated: Jul 29, 2008 21:05 IST

PTI
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Commercial and consumer loans including for cars and homes will cost more, with Reserve Bank on Tuesday announcing tough policy measures to contain high inflation, a move bankers say would lead to hike of up to one per cent in interest rates.

Seeking to bring down inflation to 7 per cent from around 12 per cent level by March 2009, the central bank on Tuesday raised banks' Cash Reserve Ratio by 0.25 per cent and short term lending rate to banks or repo rate by 0.50 per cent.

Continuing with its hawkish policy that saw the CRR going up for the fourth time this fiscal and repo rate the third time, the RBI announced steps that would suck up about Rs 8,000 crore from the banking system to moderate credit growth.

RBI, which does not see inflationary pressures easing during the next few months, has so far this fiscal taken steps to suck up about Rs 50,000 crore of liquidity.

Preferring moderation of liquidity to curb price rise, the central bank lowered economic growth projection to eight per cent from 8-8.5 per cent, while raising inflation target to seven per cent from the earlier estimate of 5-5.5 per cent.

Reacting to the RBI steps, apex industry bodies including ASSOCHAM said that these measures would dampen economic growth and business confidence, as industry would defer investments.

Bankers said interest rates for borrowers could increase by up to one per cent, while apprehending that the apex bank could further tighten the screw in the next round of review.

UCO Bank Chairman SK Goel said: "Lending rates would go up by 0.5 to one per cent." Echoing the views, top officials of most nationalised and private banks, including ICICI's Chanda Kochhar, said that they would be forced to review the rates in view of the increasing costs.

Given the current situation, the central bank said it was necessary to moderate monetary expansion and plan for a rate of money supply growth at around 17 per cent in 2008-09 in consonance with the outlook on growth and inflation so as to ensure macroeconomic and financial stability.

RBI, however, left untouched the bank rate, the key lending rate to banks, and Reverse Repo rate, at which banks park their excess liquidity with central bank, at 6 per cent.

It would review the annual policy again on October 24.

Bankers said that their profitability could get negatively impacted this fiscal on account of the successive rate hikes by the apex bank.

"Any CRR hike will impact profitability as banks earn no interest on the money parked with the Reserve Bank," United Bank's Chairman P K Gupta told PTI.

Foreign banking major ABN Amro's India Chief Meera Sanyal described the RBI move as "very aggressive and very clear in its intent to control inflation."

"GDP growth would suffer as a consequence of this monetary tightening... Inflation control remains the top priority," Reliance Money CEO Sudip Bandyopadhyay said.

Bank of Baroda's Chief Economist Rupa Rege Nitsure said the RBI's move was "pre-emptive" in nature and was aimed at containing inflationary expectations.

"Pressure on inflation is presently very high and rainfall so far has been deficient. The RBI is clearly focused on inflation containment," she said.