RESERVE BANK OF INDIA RAISED POLICY RATES

RBI raised policy rates by 50 basis points

      In a bid to check inflation, Reserve Bank today,3^rd May,2011, raised its short term lending (repo) rate by 50 basis points to 7.25 per cent, while lowering the economic growth projection to 8 per cent for the current fiscal. The RBI has also increased the saving bank rate by 50 basis points to 4 per cent to give higher returns to depositors in the wake of high inflation.RBI Governor D Subbarao announced these measures as part of annual credit policy to contain inflation, which is
hovering around 9 per cent, and sustain economic growth in the medium-term.

RBI has pegged GDP growth rate for the current fiscal at 8 per cent against the government's projection of 9 percent. The economy grew by 8.6 per cent in 2010-11.The reverse repo, the rate at which bank park funds with RBI, has been raised by 50 basis points to 6.25 per cent. Factoring in the many headwinds such as the very uncomfortable inflation, which stood at 8.98 in March and the rising crude and commodity prices, the Governor pegged down GDP growth by over 1 per cent between 7.4 and 8.5 percent for the current fiscal.

    'High oil and other commodity prices and the impact of the Reserve Bank's anti-inflationary monetary stance willmoderate growth,' Subbarao said.'Based on the assumption of a normal monsoon, and crude oil prices averaging USD 110 a barrel over the full year 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes is around 8 per cent,' he added.Making a highly ambitious inflation management objective, the policy aims at bringing down inflation to 4 to 4.5 percent for the full fiscal, with a medium term objective of 3 percent.
The Governor, however, said, 'RBI's baseline inflation projections are that inflation will remain elevated, close to the March, 11 level (8.98 percent) over the first half of FY12 before declining'.

To contain volatility in the overnight inter-bank rates, RBI has decided to open a new borrowing facility for banks under the marginal standing facility (MSF) to be effective May 7. The rate of interest on this facility will be 100 bps above the repo. The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility.As per the above norms, the difference between the reverse repo and MSF will be 200 basis points. While the repo
rate will be in the middle, the reverse repo rate will be 100 basis points below it, and the MSF rate 100 bps above it, the Governor said, adding the MSF rate gets calibrated at 8.25 percent.

On the expected policy outcome, the Governor said, the policy actions are aimed at 'first containing inflation by reining the demand side pressures, anchoring inflation expectations and sustaining growth in the medium term by containing inflation...going forward, the RBI will continue with its anti-inflationary stance'. Ref: Mathrubhumi)

                                                                               Prof. John Kurakar