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Mumbai, Mar 30: The Reserve Bank of India (RBI) on Friday made it clear that it would pursue its agenda of attacking inflation—currently at 6.46%—with a vengeance. The central bank surprised markets by unveiling a series of rate hikes on Friday, the last working day of this financial year, to further suck out liquidity from the market.
The repo rate, the rate at which RBI lends short-term money to banks, has been increased by 25bps to 7.75% with immediate effect, along with a cash reserve ratio (CRR) hike of 25bps each in two phases (starting April 14 and April 28), taking it to 6.5% from the current 6% . The CRR hike will remove over Rs 15,000 crore from the system.
Along with these steps, the interest rate applicable on eligible CRR balances has also been halved to 0.5% beginning April 14. However, the reverse repo rate (the rate at which banks park short-term funds with RBI) has been left unchanged at 6%.
Though the latest round of measures are sure to spark a series of lending rate hikes by banks, finance minister Palaniappan Chidambaram said in Mumbai that the RBI had consulted the government on the moves, and he supported them.
With the latest hikes, the RBI has now raised short-term rates (both reverse repo and repo) six times since January 2006, and hiked the CRR three times since December to arrest lending, which has grown at an average of 30% in the past three years—the fastest pace since the central bank started collating data in 1971.
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