Winding the coil and unwind it! – thats what RBI seems to have done better than most other Central banks world over since the start of the global recession. In fact, RBI has gone one step further and announced that it will come out with more frequent mid-quarterly monetary reviews, on the lines of the major central banks abroad, for swifter monetary actions in sync with changing economic conditions.
In its first quarterly review of the monetary policy, RBI today increased both the short-term lending to 5.75% and borrowing rates to 4.50% from the immediate effect. However, the apex bank has kept the Cash Reserve Ratio unchanged at 6% on account of tightness of liquidity in the system.
At the same time, the RBI’s move to up short-term rates may also hinder industrial growth – particularly the manufacturing sector – as interest rates move northwards. The RBI has also revised growth forecast at 8.5% for 2010-11.
The RBI has raised its key policy rates for the fourth time this year, in its effort to unwind the stimulus measures offered during the global slowdown, by relaxing the interest rate burden and providing boost to the consumption in the economy. This forceful hike also comes on the back of stubbornly-held double-digit inflation (10.55% in June).
The RBI has hiked the repo rate – the rate at which banks borrow from the RBI – by 25 basis points. However, an up-tick of 50 basis points in the reverse repo rate – the rate at which banks lend to the RBI – has been above analyst’s expectations who had expected a 25 basis point increase in this key policy rate.
The central bank has raised its projection for the headline inflation for March end to 6% from 5.5% as forecasted earlier. With robust rebound in the real economy, the RBI has felt the need to sync the policy rates with the current market conditions and ensure price stability necessary to support this much-needed high growth.
With as many as four hikes in this year, aimed at taming inflation, the fears about bank funds getting costlier could well trickle down into the real economy in the form of costlier as well as reduced lending opportunities to the industry.