RBI hikes CRR by 25 bps, repo rate by 50 bps

Giving the first priority to check inflation, the Reserve Bank of India, RBI on Tuesday in its first Quarterly Monetary Review has announced to hike the repo rate- the short-term rate at which RBI lends cash to banks- by 50 basis point (0.50%) from 8.5% to 9% and Cash Reserve Ratio (CRR)- the slice of cash which banks have to park with the Central bank- by 25 basis points (bps) from 8.75% to 9%.

The apex bank however, has retain the Reverse Repo Rate- the short-term rate at which RBI absorbs cash from the market- at 6% and Prime Lending Rate (PLR)- the long-term rate which banks use in housing and long-term loans to distribute the customers- at 6%.

The new rates will come into effect from August 30, 2008, as RBI Governor Y V Reddy informed to media on Tuesday in the national capital.

Reviewing the quarterly credit policy, Reddy has said, “Bringing down inflation is RBI’s first priority.” RBI is willing to lower down the soaring inflation rate from almost 12% to first 7% by the end of March 2009.

“While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5% as soon as possible and around 3% over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11-12% to a level close to 7% by 31 March, 2009,” said Reddy after the review meeting.

This move of RBI will definitely affect the banks and the realty sector, which are already facing the recession due to liquidity crunch. When this hike would be come into effect, the banks would lead to pass this hike to the customers by hiking interest rate in short term loans- personal loan.

The banks will also need to hike the deposit rate to attract the customer as continuous hiking of interest rate is leading the customer to lose the interest in parking their money in the banks deposits.

The opinion of market experts are varying on this hike, some experts are saying that the hike will hit all the sectors including industry which will also slow down the growth rate of the country while some experts believe that this move of RBI will have impact in the long term and prices of goods will be slow down soon.

To rein the inflation that has surged from 7.7 per cent at end-March 2008 to 11.9 per cent by July 12, 2008 on the back of rising prices of crude oil, food grains, food products, steel, cement and crucial commodities, RBI had hiked the repo rate three times and CRR two times earlier this year.