RBI hikes repo rate by 50bps, CRR by 25bps

Signaling further monetary tightening, the Reserve Bank of India today raised the repo rate or the rate at which it lends to banks by 50 basis points to 9 per cent. It also said that the cash reserve ratio (CRR), or the proportion of deposits that bank set aside, will go up by 25 basis points to 9 per cent with effect from the fortnight starting August 30.

This is the first time since October 2000 that repo has touched 9 per cent while CRR touched 9 per cent for the first time since late November 1999.

Banks are likely to respond to the RBI action over the next few days though bankers indicated the possibility of fresh increase in lending and deposit rates.

 

The twin hikes follows RBI’s assessment that inflation will remain high for some more time given the high global food and crude oil prices. This also prompted RBI to raise the inflation estimate for the currenct financial year to 7 per cent compared to its earlier projection of 5-5.5 per cent. In its first quarter review, the RBI, however, reiterated its resolve to lower inflation to around 5 per cent as soon as possible.

At the same time, RBI lowered the GDP growth for the currenct financial year forecast from 8-8.5 per cent to 8 per cent.

With inflation based on wholesale price index at double-digit levels, the Reserve Bank has increased the CRR 150 basis points this year, while the repo has gone up 125 basis points, including the latest announcements. The bank rate and the reverse repo rate have, however, been left unchanged.

“While there are early signs of some moderation in money supply and deposit growth, they continue to expand above the indicative projections warranting continuous vigilance and appropriate and timely policy responses,” RBI said.

Banking stocks reposnded negatively to RBI’s announcement in the first quarter review.