RBI Raises Short Term Lending Rate By 0.25%; To Curtail Credit Especially To Realty
Reserve Bank of India announced its quarterly monetary policy amendments today. This was a highly watched document since inflation in India had topped a high of 6 per cent last fortnight. And RBI was expected to take some stringent measures to tighten the liquidity in the country.
RBI has raised its key short-term lending rate (repo rate) by 25 basis points to 7.50 per cent (was expected by the market) to its highest in nearly four years. This step is expected to rein in inflation and arrest the growth of credit to certain extent. However, RBI has kept reverse repo, bank rate and cash reserve ratio (CRR) unchanged. Currently bank rate stays at 6 per cent, reverse repo rate at 6 per cent and CRR at 5.5 per cent.
RBI is especially worried about the growth of credit in real estate. RBI Governer Y V Reddy told the media about the concerns in unrealistic levels of credit growth in real estate. It looks like the central bank is suspecting an asset bubble in India.
Time of India has a detailed story here.
Main points here:
–Repo Rate increased to 7.50 per cent from 7.25 per cent.
–Reverse Repo Rate, Bank Rate and Cash Reserve Ratio (CRR) kept unchanged.
–GDP growth forecast at 8.5-9.0 per cent during 2006-07.
–Inflation to be brought down as close as possible to 5.0-5.5 per cent at the earliest, while continuing to pursue the medium-term goal of a ceiling on inflation at 5.0 per cent.
–Provisioning requirement increased to two per cent for standard assets in the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans (excluding residential housing loans).
–Banks are being restrained from granting fresh loans, in excess of Rs. 20 lakh, against NRE and FCNR(B) deposits and being advised not to undertake artificial slicing of the loan amount to circumvent the ceiling.
–Over the remaining part of the year, management of liquidity would receive priority in the policy hierarchy. Consequent upon the tightening of market liquidity, the impact of monetary policy is expected to be stronger than before.
–RBI will ensure that appropriate liquidity is maintained in the system so that all legitimate requirements of credit are met, particularly for productive purposes, consistent with the objective of price and financial stability.
07/10/07, 4:48 PM |
This is a worrying fact indeed. The only chance for the Indian economy to survive if the matter gets worse would be for the RBI to take several loans from international financial institutions and invest the money as quickly as possible right back into the economy. The worst move would be spending the money for a macro regulation of the economy, strategy that would pay off only on short term.