RBI hikes interest rates in credit policy, loans may turn costlier

The Reserve Bank of India today held its credit policy meeting in which it announced strict measures to be taken to face the challenge being put by inexorable inflationary pressure. The central bank said it has become necessary to hike mandatory cash reserve of the banks and its short-term lending rates to suck up an estimated Rs 8,000 crore (Rs 80 billion).

On Monday, RBI Governor Y. V. Reddy while presenting the first quarter review of the annual statement on Credit and Monetary Policy for the year 2008-09 announced the hike in reserve repo rate by 0.25 per cent to 8.75 per cent and the short-term lending (repo) rate by 0.50 percent to 9.00 per cent. The rates will come into effect from the fortnight beginning August 30, 2008

As per the analysts this move of central bank can make loans dearer for housing, car and personal expenses as also to the industry.

The central bank has kept its other rates such as the Bank Rate and CRR unchanged at 6 per cent and 5 per cent respectively.

RBI has maintained the GDP growth projection for 2008-09 at 8.0-8.5 per cent to around 8.0 per cent, barring domestic or external shocks in its first quarterly review of the Monetary Policy announced on Tuesday. Governor added the policy actions will aim to bring down the current distressing level of inflation to a bearable level of below 5.0 per cent as soon as possible and about 3.0 per cent over the medium-term. He added at this time the practical approach of the policy will be to bring down inflation from the current level of about 11.0 – 12.0 per cent to a level close to 7.0 per cent by March 31, 2009.

In the press conference Dr Reddy said though there are early signs of some moderation in money supply and deposit growth but they continue to expand above the analytic projections necessitating for continuous vigilance and appropriate and timely policy responses.

"Monetary policy may not be unidirectional. Global economy and financial markets are changing swiftly. As far as global developments are concerned, we should be prepared to move in either direction in the longer term," Dr Reddy said.

Dr Reddy added in view of the developing environment of increasing uncertainty in global markets and the dangers of potential spillovers to domestic markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.

Expecting the emergence of any adverse and unexpected developments in various sectors of the economy, assuming that capital flows are effectively managed and taking in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly emphasize in ensuring a monetary and interest rate environment which is mainly concerned with price stability, credit quality as well as credit delivery, especially for employment-intensive sectors, while pursuing financial inclusion.



RBI hikes interest rates in credit policy, loans may turn costlier

The Reserve Bank of India today held its credit policy meeting in which it announced strict measures to be taken to face the challenge being put by inexorable inflationary pressure. The central bank said it has become necessary to hike mandatory cash reserve of the banks and its short-term lending rates to suck up an estimated Rs 8,000 crore (Rs 80 billion).

On Monday, RBI Governor Y. V. Reddy while presenting the first quarter review of the annual statement on Credit and Monetary Policy for the year 2008-09 announced the hike in reserve repo rate by 0.25 per cent to 8.75 per cent and the short-term lending (repo) rate by 0.50 percent to 9.00 per cent. The rates will come into effect from the fortnight beginning August 30, 2008

As per the analysts this move of central bank can make loans dearer for housing, car and personal expenses as also to the industry.

The central bank has kept its other rates such as the Bank Rate and CRR unchanged at 6 per cent and 5 per cent respectively.

RBI has maintained the GDP growth projection for 2008-09 at 8.0-8.5 per cent to around 8.0 per cent, barring domestic or external shocks in its first quarterly review of the Monetary Policy announced on Tuesday. Governor added the policy actions will aim to bring down the current distressing level of inflation to a bearable level of below 5.0 per cent as soon as possible and about 3.0 per cent over the medium-term. He added at this time the practical approach of the policy will be to bring down inflation from the current level of about 11.0 – 12.0 per cent to a level close to 7.0 per cent by March 31, 2009.

In the press conference Dr Reddy said though there are early signs of some moderation in money supply and deposit growth but they continue to expand above the analytic projections necessitating for continuous vigilance and appropriate and timely policy responses.

"Monetary policy may not be unidirectional. Global economy and financial markets are changing swiftly. As far as global developments are concerned, we should be prepared to move in either direction in the longer term," Dr Reddy said.

Dr Reddy added in view of the developing environment of increasing uncertainty in global markets and the dangers of potential spillovers to domestic markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.

Expecting the emergence of any adverse and unexpected developments in various sectors of the economy, assuming that capital flows are effectively managed and taking in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly emphasize in ensuring a monetary and interest rate environment which is mainly concerned with price stability, credit quality as well as credit delivery, especially for employment-intensive sectors, while pursuing financial inclusion.