RBI hikes rates

In an attempt to contain the rising inflation RBI decided to take steps to push up interest rates. It increased repo rate by 25 basis points to 5.5% amid a tight liquidity scenario in the banking sector. As banks’ cost of funds will rise, the measure is likely to increase lending rates on car and home loans. However, this will not affect existing customers of the banks, which have already fixed their base rates. As base rates are fixed for three months and can be changed only after September 30, the interest rates on home, car and other loans will remain unchanged till then for existing customers. But in case of new customers, banks are likely to increase the premium over base rates to charge them higher interest rates. The central bank has also increased the reverse repo rate by 25 basis pointsto 4%. However, in the tight money market condition, when banks are net borrowers from RBI, this measure would not have any impact on interest rates immediately. Considering a tight liquidity scenario, RBI has avoided to tweak the cash reserve ratio (CRR) at 6% – proportion of deposits that a bank needs to keep with RBI – and decided to continue with its liquidity easing measures. FM Pranab Mukherjee said these measures are needed as core inflation has risen and credit situation is tight. He further said that it is good that RBI has not raised CRR. The increase in rates comes ahead of the July 27 policy review by the central bank as the inflationary pressure is set to rise with increase in fuel prices. RBI said fuel prices will have an impact of around one percentage point on inflation. Wholesale prices-based inflation crossed double digits (10.16% provisionally) in May, but as per final figures, the rate of price rise has been 11 per cent or more since February. Food inflation eased to 12.92% in the third week of June from above 16%. Although the monetary tightening steps are being announced at a time when the banks are complaining of a liquidity crunch arising from payment of more than Rs 1 lakh crore towards 3G licence fees and advance taxes, the RBI said the liquidity situation has started improving.