RBI hikes repo rate by 25 bps

HOUSING LOANS UNTOUCHED, REAL ESTATE, PERSONAL LOANS UNDER LENS

Borrowing costs are set to rise again across the board, more sharply for commercial real estate and capital market players, with the Reserve Bank of India (RBI) today tightening liquidity and targetting some sectors to check excessive credit growth.

The RBI, in its quarterly monetary policy review, raised its overnight lending (repo) rate by 25 basis points to 7.50 per cent and sharply increased bank provisioning (or risk cover) on loans to commercial real estate, personal loans and capital market exposure from 1 per cent to 2 per cent, as it sought to balance accelerated growth and inflationary pressures, especially runaway rises in property and equity prices. Housing loans, however, have been left untouched.

The central bank has also not talked of bringing inflation down to the 5-5.5 per cent target, saying the objective at the current juncture is to bring inflation "as close as possible" to the target range "at the earliest" while continuing to pursue the medium-term goal of a ceiling on inflation at 5 per cent. The GDP growth target has been raised for the second time since April 2006 to 8.5-9.0 per cent.

Initial estimates by analysts put the additional provisioning requirements at over Rs 2,000 crore. Banks are expected to pass on a large part of the additional provisioning to borrowers through another 25-50 basis point increase in prime lending rates (PLRs). Banks have raised PLRs by 75-150 basis points since April 2006.

The RBI also sought to marginally reduce the impact of capital inflows on liquidity by making investments by non-resident Indians (NRIs) in deposit schemes in India unattractive. The ceiling on interest rates for non-resident Indian (NRI) deposits has been reduced by up to 50 basis points.

Countering criticism that interest rate increases would stifle growth, RBI Governor Y V Reddy said, "High inflation dampens growth and leads to imbalances and vulnerabilities."

Finance Minister P Chidambaram broadly endorsed the move, saying, "Interest rate is a small part of overall cost and I am confident industry will go ahead with their investment plans."

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REDDY'S RECKONER

REPO RATE Raised 25 basis points to 7.50 per cent, a 4-year high

REVERSE REPO RATE Unchanged at 6.00 per cent

CASH RESERVE RATIO Kept steady at 5.50 per cent after raising it by 50 basis points last month

MONETARY STANCE

To ensure price stability and anchor inflation expectations.

Considers the increase in bank credit "clearly excessive"

Liquidity management a priority

INFLATION

To bring inflation down as close as possible to 5.0-5.5 per cent.

Raises GDP forecast for the second time in nine months to 8.5-9 per cent from 8 per cent in April 2006