RBI hikes key rates to check inflation

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Mamta

06 July, 2010

Just a few weeks ahead of next quarterly review of monetary policy, the Reserve Bank of India has hiked repo and reverse repo rates to 5.5% and 4% respectively to contain inflation.

JUST A few weeks ahead of the next quarterly review of monetary policy, the Reserve Bank of India has hiked repo and reverse repo rates to 5.5% and 4% respectively to contain inflation. The repo rate is the rate at which RBI lends money to commercial banks and the reverse repo rate is the rate at which it drains out surplus liquidity from the banking system. Economists are expecting another round of rate hike on 27 July when RBI is going to review its monetary policy.

Finance Minister Pranab Mukerjee has supported this hike calling it desirable and said that it’s “good that RBI has not raised cash reserve ratio (CRR)”. Such hikes in policy rates will make money costlier for corporations, retailers and borrowers. After the decision of government to hike fuel prices and deregulate the prices of petrol this policy measure is very much on the expected lines. This will increase the lending rates in the near future.
The hike in the petroleum prices last week will add one more percentage point to the inflation. Further the government is also considering to hike the price of diesel and to deregulate it. It will further increase the inflation and again there will be need to take strict monetary measures. Such tight measures will absorb money from the market which in turn would affect the growth rate.

There is already a liquidity crunch in the market and yet the government, especially the chairman of Prime Minister’s Economic Advisor Council (EAC), C Rangarajan is positive about achieving 8.5% growth in the current fiscal.