Finance Minister Pranab Mukherjee on Friday called the Reserve Bank of India's (RBI) decision to raise key policy rates "desirable", even as a leading industry body voiced concern over the increase in cost of borrowing for corporates.
In an attempt to contain soaring inflation, the RBI hiked the repo rate by 25 basis points to 5.5 per cent and the reverse repo rate by a similar quantum to 4 per cent, saying it was part of its "calibrated exit" from a more relaxed monetary policy.
The RBI said the monetary measures "should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process".
"These measures are desirable given that core inflation has risen and credit situation is tight," said Mukherjee in a statement.
It is good that RBI has not raised Cash Reserve Ratio (CRR), the minister added.
The repo rate, which was 5.25 per cent prior to Friday's revision, is the interest charged by the central bank on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for commercial banks.
The reverse repo, which stood at 3.75 per cent, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park their funds with the RBI.
Cash reserve ratio is a bank regulation that sets the minimum reserves each bank must hold by way of customer deposits and notes. These deposits are designed to satisfy cash withdrawal demands of customers.
Explaining its decision, which came after the stock markets closed, the RBI said a combination of factors, including soaring inflation, which had spread from food prices to other items, prospects of a normal monsoon, sustaining economic recovery and upbeat industrial production numbers prompted it to raise the rates.
"The developments on the inflation front raise several concerns. This mid-cycle policy action has been warranted by the evolving macroeconomic situation," said the RBI in a statement.
Banks have been under pressure because of a huge payout by telecom operators to the government on account of of 3G and broadband wireless access (BWA) license fees.
The RBI had introduced measures to ease liquidity in May to counter the impact of this payout and said Friday that it was continuing these measures, as it did not want to hamper borrowing activities.
"Easing liquidity and raising rates at the same time may seem apparently inconsistent. It should be noted in this context that the liquidity easing measures have become necessary to manage what is essentially a temporary and unanticipated development," said the statement.
Though a leading industry body came out in support of the central bank's decision, it said that cost of borrowing for India Inc should be maintained within a "reasonable band".
"The cost of funds for industry should remain within a reasonable band for growth and recovery to become broad based. The government should think of ways to spend its cash balances built up with the RBI in order to ensure that non-availability of funds does not become a dampener to growth," Confederation of Indian Industry (CII) director general Chandrajit Banerjee said.
The RBI is scheduled to take up its quarterly review of the monetary policy July 27.
"We could see interest rates on housing, car loans going up. I expect another round of hikes, by 25 basis points, July 27," Crisil's principal economist D. K. Joshi said.