Simultaneously, the RBI sought to enhance credit quality with a slew of measures, including spiking the repo rate (the rate at which it lends to banks) by 25 basis points to 7.5% from 7.25%. This is the fifth time the RBI has raised the repo rate in an 18-month period. The rate is now at a four-year high.

To ensure credit quality and tighten lending to those parts of the retail segment which are clearly causing concern for the central bank, the RBI raised provisioning requirements for several sectors, including doubling it to 2% for standard assets for the real sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans (excluding residential housing loans).

There has also been an increase in the provisioning requirement for bank exposure to the non-deposit-taking non-banking finance companies (NBFCs) to 2% from 0.4% and in risk weight to 125% from 100% earlier. Indicating that the RBI would follow an open-ended strategy, responding appropriately as and when required, RBI governor Yaga Venugopal Reddy told reporters: “Containing inflation does not always mean limiting growth. Our objective here is to facilitate growth while controlling inflation. Yes, our policy has made money expensive. We have done it to moderate demand for credit growth.’’

Apex Action

• Reverse repo rate unchanged at 6% • CRR unchanged at 5.5% • Provisioning needs for loans to real estate, credit card receivables, personal loans, capital market and NBFCs hiked • Medium-term inflation seen at 5% • Ceiling on interest rates for NRE, FCNR(B) deposits reduced

Summing up his three-pronged anti-inflationary policy measures, Reddy said the RBI—barring the emergence of any adverse and unexpected developments—would reinforce the emphasis on price stability, re-emphasise credit quality and respond swiftly with all possible measures to the evolving global and domestic situation impinging on inflation expectations and the growth momentum.

The review stated that over the remaining part of the year, management of liquidity would receive priority and consequent upon the tightening of market liquidity, the impact of monetary policy is expected to be stronger than before. The RBI would use all policy instruments including CRR to ensure appropriate modulation of liquidity in responding to the evolving situation.