Our Bureau

Aimed at containing inflationary pressures

Mumbai , June 8

In a bid to contain inflationary pressures following the recent hike in fuel prices, the Reserve Bank of India on Thursday marked up its key short-term interest rates by 0.25 percentage point with immediate effect.

The RBI has hiked the reverse repo rate to 5.75 per cent from 5.50 per cent and the repo rate to 6.75 per cent from 6.50 per cent.

Bankers and analysts said that the RBI's move could lead to a further hike in interest rates, though some banks had very recently raised both deposit and lending rates.

"On a review of current macroeconomic and overall monetary conditions, the RBI has decided to increase the reverse repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points to 5.75 per cent from 5.50 per cent with immediate effect," said a release from the central bank late on Thursday evening.

The reverse repo rate is the rate at which the RBI borrows or absorbs excess funds from banks.

In the last fiscal, the RBI had raised reverse repo rates three consecutive times, most recently in the January 2006 quarterly review of the credit policy.

While the apex bank had kept interest rates intact in the annual policy review in April, it had hinted at a possible hike in rates in the event of an upturn in inflation due to pass-through of international oil prices "to ensure a monetary and interest rate environment that enables continuation of the growth momentum consistent with price stability while being in readiness to act in a timely and prompt manner on any signs of evolving circumstances impinging on inflation expectations."

The RBI's measure is also being read as a pre-emptive move to rein in the inflationary impact of higher oil prices.

The annual wholesale price index-based inflation rose 4.74 per cent during the week ended May 20, higher than the previous week's annual rise of 4.32 per cent.

Market participants had expected a rate hike before the policy review due in July 2006, taking a cue from the language adopted by the central bank.

The US Federal Reserve has hinted at further increase in interest rates, while the European Central Bank has already effected a rate hike.

`Timing right'

Mr M.V. Nair, Chairman and Managing Director of Union Bank of India, said that the timing of the hike was appropriate considering indicators such as further hike in the US interest rates as seen from the Federal Reserve Chairman's recent statement, hike in domestic fuel prices, and the upward bias in inflation.

"In the last policy, everybody was expecting a rate hike but that did not happen.

"The impact of this will be that the 20 per cent credit growth as mentioned by the RBI in its annual monetary policy will happen, but over 33 per cent growth as seen in the last two years may not happen," he added.

However, bankers also said that ample liquidity would neutralise the impact of this measure.

"The RBI may have done this to keep liquidity under check. Worldwide, there is hardening of rates.

"This is a move to absorb liquidity and this rate hike was expected," said Mr M. Balachandran, Chairman and Managing Director of Bank of India.

© Copyright 2000 - 2009 The Hindu Business Line