Monetary policy brings another 25 bps rise in key rates
By Neelima Shankar
Apr 21, 2010
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The Reserve Bank of India finally gave another hike to the key policy rates in order to tame the towering inflation and sustain the economic growth.

In the announcement of monetary policy for the year 2010-11, the central bank raised repo and reverse repo rates by 25 basis points to 5.25% and 3.75% while the cash reserve ratio (CRR) received a 25 basis point hike and reached 5.75%. Repo rate refers to the rate at which banks borrow money from the RBI while reverse repo rate is the rate at which the banks park their excess cash with the RBI. CRR is the portion of deposits that banks need to keep with RBI.

The increased CRR will come into effect from the 24th of April 2010 and with this the RBI aims to absorb Rs. 12, 500 crore worth excess liquidity from the system. The RBI had earlier raised CRR by 75 basis points in January following which many banks calibrated their deposit rates. It had also hiked repo and reverse repo rates by 25 basis points in around the month of March.

"There will be no immediate impact on interest rates as there is adequate liquidity in the system. For the next two to three months there will not be any increase in rates," said Keki Mistry, vice-chairman and chief executive officer HDFC Ltd. "It is possible that the Reserve Bank of India could hike CRR by another 25 basis points prior to the next policy review," he added.

"The RBI appears comfortable on sustained growth given the uptrend in exports, broad-based industrial recovery, uptick in services and improved corporate profitability," said Rohini Malkani, economist, Citi India.

Subbarao also said that it is alwayz possible that the RBI may further increase these rates in the upcoming quarterly reviews of the monetary policy. "It looks like we have to move many times... I will not rule out a mid-cycle action," he said. "We will think many times before we take mid-cycle action."

Chanda Kochhar, managing director and CEO, ICICI Bank Ltd, said: "There will be an upward bias on interest rates as credit demand picks up. Credit demand normally picks up in the second quarter."

Rana Kapoor, managing director and CEO of Yes Bank, said: "The 25 basis points hike is optimal for the economy to absorb and ensure sustainable growth. A sharp increase in rates would dampen the investment multiplier."


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