RBI hikes reverse repo rate by 25bps

ess Trust Of India / Mumbai April 28, 2005Bank Rate, CRR unchanged; FM says lending rates will not move up.

The Reserve Bank of India (RBI) today hiked the reverse repo rate by 25bps to 5% from 4.75% w.e.f April 29, 2005. "The repo rate will continue to be linked to the reverse repo rate. However, the spread between the reverse repo rate and the repo rate is reduced by 25 bps from 125 basis points to 100 basis points with effect from April 29, 2005.

"Accordingly, the fixed repo rate under LAF will continue to remain at 6%," the credit policy statement for 2005-06 said.

The Bank Rate and CRR have been left unchanged at 6% and 5%, respectively.

The economic growth for 2005-06 was pegged at 7%. Agricultural growth is likely to be 3% and industry and services sectors are expected to continue the current growth momentum while absorbing the impact of oil prices.

The inflation rate for the current fiscal is estimated to be in the range of 5-5.5%, RBI Governor Y V Reddy said while addressing the bankers.

"The monetary policy would aim to provide liquidity for credit growth and support investments along with emphasis on price stability," the statement said.
  

Rate hike will not lead to higher lending rates: FM 

Finance minister P Chidamabaram today indicated that the increase in reverse repo rate, announced in the credit policy, will not raise bank lending rates, and allayed fears on inflation by promising steps to ensure price stability. 

"The assumption you are making that increase in reverse repo by 25 basis points will have an immediate impact on bank lending rate is not correct," he told reporters while reacting to the monetary and credit policy released today. 

"There is enough liquidity in the market, and therefore lending rate will be benign. There are many cases where lending takes place at sub-PLR rates," he added. 

On inflation, Chidambaram said: "There cannot be knee-jerk reaction on inflation. The recent movement in inflation is because of base effect. Inflation is under control, but oil continues to be a concern. We will take every step to maintain price stability." 

On GDP growth projections, the finance minister said, "I am very happy that RBI has concurred with the views of the department of economic affairs." 

On borrowings, Chidambaram said, "We may not borrow as much as indicated in the budget. Our calculations now show that we may have to borrow less than that. The government was to borrow Rs 10,000 crore in the first week of May. We will restrict our borrowing to Rs 8,000 crore."

Reddy said the focus would be on financial stability and stabilising inflationary expectations.

The RBI, starting this financial year, would also conduct quarterly review in July and January in addition to the mid-term review in October, the statement said.

Reddy said it was desirable to keep the CRR rate unchanged following the review of the current liquidity situation though the central bank would continue to pursue the mid-term objective of reducing the CRR to minimum statutory level of 3%.

On credit flow to medium enterprises, he said there was an urgent need to upgrade technology of small scale industries. The central bank would explore modalities to meet their growing financial needs.

A simplified debt restructuring and rehabilitation mechanism is also being considered for the sector, he said, adding the credit information bureau of india (CIBIL) is working out a solution that would provide credit reports on SSIs.

The RBI is reviewing all its existing guidelines on financing small scale sector, debt restructuring, nursing of sick units with a view to rationalising, consolidating and liberalising them, he added.

Click here for the Annual Policy Statement for the year 2005-06