RBI hikes to push up interest rates later

But Tuesday’s hike — the second policy action in a month — will lead to a gradual rise in interest rates as banks will see Rs 12,500 crore squeezed out from their system following the 25 basis points hike in CRR, lenders said.

The repo rate — at which the RBI lends short-term money to banks —  has been hiked to 5.25 per cent from 5 per cent. At the same time, the CRR requirement for banks has been raised by 25 basis points to 6 per cent.
Though the interest rate hike is with immediate effect, the CRR rise will be with effect from April 24.

These measures, the RBI hopes, will help contain inflation without affecting the process of economic recovery. Wholesale prices-based inflation stood at 9.90 per cent in March this year, fuelled by high food prices.

Briefing reporters here, RBI Governor D Subbarao said the apex bank wants to normalise policy rates in a calibrated manner but at the same time it is “keeping tight monetary vigil on liquidity situation.”

Subbarao also said the RBI won’t rule out further monetary tightening before the next review at the end of July. “But we will think many times before taking mid-cycle action,” he said.

Dalal Street gave the thumbs- up to the RBI’s policy to increase rates moderately with a 60-point increase in the sensex. Most bankers are of the view that since there is sufficient liquidity in the system, interest rates will not see any hike immediately.

The RBI also said that its policy actions would not halt the recovery and pegged the GDP growth for 2010-11 at 8 per cent. It also pegged the wholesale inflation, which is currently hovering close to the double-digits, at 5.5 per cent for fiscal year 2011.
It, however, thinks the Rs 4.57 lakh crore government borrowing plan is likely to pose a bigger challenge to the central bank to manage in the current fiscal.