NEWS & ADVICE : EDUCATION LOANS
RBI hikes repo, CRR to curb inflation
By Vaibhav Aggarwal
Jun 25, 2008
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Inflation is looming large in India, and to curb it RBI is on the move. In less than fifteen days, the RBI has dealt another blow to the consumers and banks, by hiking two key rates, repo rate and cash reserve ratio (CRR) by 50 basis points each. Repo rate is the rate which the RBI charges the banks, hence, in a way; a higher interest rate makes it costlier for banks to borrow money from the central bank. Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. A higher rate of borrowing not only means reduced borrowing by banks, but also a higher rate of borrowing for the consumers.

This move might trigger another round of interest rate shuffles, as seen over the last two weeks by most banks, in response to the RBI repo rate hike on June 11. Experts believe all loans will go up, from housing loans to car loans, from consumer loans to corporates borrowing for their business.

However, with lending rate increase, the deposit rate is also expected to increase. This would make it more profitable for consumers to keep their money into banks, hence, curbing their demand. To curb the inflation rate, which stands at a 13 year high of 11.05%, RBI raised the repo rate to 8.5% from 8% with immediate effect. In addition to this, it also decided to increase CRR from 8.25% to 8.75%. This would, however, be done in two stages. From July 5, CRR will be set at 8.50%, and from July 19, at 8.75%.


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