RBI raises repo rate
RBI has raised the short-term repo rate by 25 bps to 7.50 per cent, while keeping reverse repo (6 per cent), bank rate (6 per cent) and CRR (5.50 percent) unchanged.
Concern over surging inflation is the dominant theme of the quarterly review of monetary policy and the hike is on expected lines as the central bank had given enough indications in its macroeconomic review that it is worried about the underlying inflationary pressures. Inflation, which had breached the 6 per cent mark in the first week of January, had eased marginally to 5.95 per cent in the following week ended January 13. The RBI’s year target band for inflation is 5-5.50 per cent. Meanwhile, the Government on its part has taken a series of fiscal measures to rein in the rising inflation.
Repo rate is the rate at which the central bank buys securities to infuse liquidity in the system and reverse repo rate is the rate at which it sucks out excess liquidity by selling securities in the market. The daily repurchase window is expected to provide a ‘corridor’ for the overnight rates, with reverse repo rate and repo rate acting as the floor and the ceiling respectively. By increasing the repo rate while keeping the reverse repo rate unchanged, RBI has widened the spread to 150 bps which has traditionally been maintained at 100 bps. Interbank overnight rates tend to stay near the repo rate in a situation of tight liquidity as prevailing now.
Echoing the all-pervasive bullish outlook on economy, the RBI has revised upwards the GDP growth projection to 8.5 to 9 per cent in 2006-07 as compared to 8 per cent projected in mid-term review and 7.5 to 8 per cent earlier. On inflation, it observed prices of food articles would have considerable impact on headline inflation over the rest of the year. The seasonal decline in prices of food articles in the second half of the year has been less than normal. The prices of manufactures are firming up and were close to the headline level by the end of December.
The central bank has re-iterated its worries on continued high credit growth in the real estate sector, also identifying outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans as a matter of concern. It says, there are abiding concerns relating to the persistently high credit growth and the potential for erosion in the quality of credit so that balance sheets of banks need to be fortified against the build-up of loan delinquencies by precautionary provisioning and a greater sensitivity to underlying risks by enhancement of risk weights applied to advances to specific sectors in which banks’ exposures have been rising at a fast pace.
Significantly, RBI has signaled in its statement that more interest rate hikes are on the cards, as the economy continues to grow ferociously and containing inflation takes priority in policy. RBI mentions that early warning signals emanating from rising inflation in an environment of high money and credit growth indicate that monetary policy is still accommodative, warranting a policy response in terms of a measured increase in interest rates to assuage demand pressures. The stance of monetary policy has progressively shifted from an equal emphasis on price stability alongside growth to one of reinforcing price stability with immediate monetary measures.
RBI has raised the short-term repo rate by 25 bps to 7.50 per cent, while keeping reverse repo (6 per cent), bank rate (6 per cent) and CRR (5.50 percent) unchanged.
Concern over surging inflation is the dominant theme of the quarterly review of monetary policy and the hike is on expected lines as the central bank had given enough indications in its macroeconomic review that it is worried about the underlying inflationary pressures. Inflation, which had breached the 6 per cent mark in the first week of January, had eased marginally to 5.95 per cent in the following week ended January 13. The RBI’s year target band for inflation is 5-5.50 per cent. Meanwhile, the Government on its part has taken a series of fiscal measures to rein in the rising inflation.
Repo rate is the rate at which the central bank buys securities to infuse liquidity in the system and reverse repo rate is the rate at which it sucks out excess liquidity by selling securities in the market. The daily repurchase window is expected to provide a ‘corridor’ for the overnight rates, with reverse repo rate and repo rate acting as the floor and the ceiling respectively. By increasing the repo rate while keeping the reverse repo rate unchanged, RBI has widened the spread to 150 bps which has traditionally been maintained at 100 bps. Interbank overnight rates tend to stay near the repo rate in a situation of tight liquidity as prevailing now.
Echoing the all-pervasive bullish outlook on economy, the RBI has revised upwards the GDP growth projection to 8.5 to 9 per cent in 2006-07 as compared to 8 per cent projected in mid-term review and 7.5 to 8 per cent earlier. On inflation, it observed prices of food articles would have considerable impact on headline inflation over the rest of the year. The seasonal decline in prices of food articles in the second half of the year has been less than normal. The prices of manufactures are firming up and were close to the headline level by the end of December.
The central bank has re-iterated its worries on continued high credit growth in the real estate sector, also identifying outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans as a matter of concern. It says, there are abiding concerns relating to the persistently high credit growth and the potential for erosion in the quality of credit so that balance sheets of banks need to be fortified against the build-up of loan delinquencies by precautionary provisioning and a greater sensitivity to underlying risks by enhancement of risk weights applied to advances to specific sectors in which banks’ exposures have been rising at a fast pace.
Significantly, RBI has signaled in its statement that more interest rate hikes are on the cards, as the economy continues to grow ferociously and containing inflation takes priority in policy. RBI mentions that early warning signals emanating from rising inflation in an environment of high money and credit growth indicate that monetary policy is still accommodative, warranting a policy response in terms of a measured increase in interest rates to assuage demand pressures. The stance of monetary policy has progressively shifted from an equal emphasis on price stability alongside growth to one of reinforcing price stability with immediate monetary measures.
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