Need to Look Beyond Monetary Reforms: Inflation Induced Interest Hikes would Impact Exporters
The Reserve Bank of India has sharply hiked key rates by 50 basis points in the 11th such exercise since January 2010 to tame inflation, setting the stage for commercial banks to raise their interest charged on personal and corporate loans. The central bank has revised its repo rate to 8 percent from 7.5 percent and reverse repurchase rate, or interest paid on short-term lending, raised to 7 percent from 6.5 percent. The rate hikes were affected by Reserve Bank of India (RBI) Governor D. Subbarao during the first quarterly review of the apex bank's monetary policy for this fiscal year.
"Notwithstanding signs of moderation, inflationary pressures are clearly very strong," Subbarao said, addressing the chief executives of commercial banks after the policy update. "Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for wholesale inflation for March 2012 is revised upward from 6 percent with an upside bias."
In the policy update, the reserve ratios -which call for the quantum of money against deposits banks have to keep as liquid assets -stood unchanged at 6 percent in the case of cash reserve ratio and 24 percent in the case of statutory liquidity ratio. Briefly, the new rates would work out to:
The Reserve Bank of India's (RBI) aggressive monetary tightening measures would help bring down inflation to a comfortable level of six to seven percent by the end of this year from the current near double-digit, Finance Minister Pranab Mukherjee said. Reacting to the RBI's move, Mukherjee said through the rate hike the Central bank had sought to give a "strong signal to further moderate inflation and check inflationary expectations". "With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year end inflation level of six to seven percent," Finance Minister said in a statement. On impacts of rate hike on the economic growth, Mukherjee said despite some moderation in the recent months he was hopeful of maintaining the growth momentum.