RBI hikes rates, banks might wait till July 27th

By BankBazaar.com | July 8, 2010

Although easing liquidity is not in sync with the rate hike, RBI has decided to go easy on liquidity because of the temporary liquidity squeeze on account of advance tax outflow and 3G spectrum payments. RBI has decided to extend its liquidity management measure of 0.5% of the bank’s net demand and time liabilities under LAF to July 16 from July 2. Any resultant shortfall in SLR arising out of availing of this facility will not be penalized.

In a bid to rein in inflation that has been on the run in the past few months and a major concern area for the policy maker, RBI the country’s Central bank has increased key rates i.e. repo rate and reverse repo rate by 25 bps each to 5.50% and 4% respectively with immediate effect. Repo rate is rate at which RBI lends to banks and reverse repo is the rate at which RBI sucks liquidity out of the system.

This move has come on the back of recent increase in fuel prices which will have an impact on inflation in the coming months. RBI maintains that the fuel price hike may have a one percentage point impact on the Wholesale Price Index (WPI) on an immediate basis and second round effects will be felt in the months to come. Also, although food prices inflation has been tapering downwards after a spiral upwards, the prices of non-food manufactured goods have accelerated and so inflation is likely to see a pressure upwards.

Given this backdrop and the drawing comfort from fact that the economy is recovering and consolidating as is indicated from the industrial activity, and better than last year monsoon situation, RBI decided to focus on containing inflation. While doing so, it is constantly reviewing the economic condition in the country so as to ensure that any step that it takes is not a hindrance to economic growth.

Although easing liquidity is not in sync with the rate hike, RBI has decided to go easy on liquidity because of the temporary liquidity squeeze on account of advance tax outflow and 3G spectrum payments. RBI has decided to extend its liquidity management measure of 0.5% of the bank’s net demand and time liabilities under LAF to July 16 from July 2. Any resultant shortfall in SLR arising out of availing of this facility will not be penalized.

RBI expects the measures taken to contain and anchor inflationary expectations in the coming months. The Central Bank has reiterated that it will follow a calibrated exist strategy which means steps will be taken to anchor inflation without hurting growth.

Bankers are unlikely to hike rates immediately as they would like to wait for the announcements by the Central Bank in the quarterly monetary policy review scheduled for July 27th.. That means currently there will be no impact on the EMIs of home loans and personal loans.

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