RBI hikes repo, reverse repo by 25 bps each, CRR unchanged

D Subbarao governor of the Reserve Bank of India on Tuesday announced a hike of 25 basis points in the repo and reverse repo rates, respectively, in the mid-year review of its credit policy. The cash reserve ratio (CRR), as expected, has been left untouched at 6%.

Accordingly, the new repo rate, at which it lends to banks, stands at 6.25% and the reverse repo rate, at which it absorbs extra cash, at 5.25%.

The RBI had cautioned on Monday that inflation was still above its comfort level, adding to expectations that it will raise interest rates for the sixth time this year at the review.

The bank, however, has clearly indicated that there is no need for further hikes in the near term. “The likelihood of further rare actions is relatively low and there is no need for further rate hikes in the immediate term,” Subbarao said adding that the rates have been hiked in order to sustain anti-inflationary thrust of policy and to contain liquidity deficit within a reasonable limit.

RBI's move to raise its lending and borrowing rates strikes the right balance between managing inflation and promoting growth, the deputy chief of the Planning Commission Montek Singh Ahluwalia said.

RBI further said that the domestic economy is on a strong footing and it will act against disruptive lumpy capital flows. “The policy will ensure that the liquidity remains in balance, even when inflation and inflationary expectations remain high. There is a need to contain demand side inflationary pressures,” he added.

The baseline projection of real gross domestic product (GDP) growth for 2010-11, for policy purposes, has been retained at 8.5% and that of wholesale price index (WPI) inflation for March 2011 is at 5.5%.

Caveat on loans
The Reserve Bank has has upped bank provisioning for teaser loans to 2% from 0.4%. Also, the loan-to-value ratio of housing loans will not exceed 80%. Loans above Rs 75 lakh too have become expensive as the RBI has upped risk for home loans above the said amount to 125%.

Impact on bonds
The RBI has mentioned that it will cease hiking rates for now. This indicates clearly that there is a pause, which will have a positive impact on bonds.

Source: www.moneycontrol.com

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Gaurav Agarwal
Head Dealer
DENIP Consultants Pvt Ltd