The Reserve Bank of India springs back to action to tackle the mounting inflation much before the upcoming credit policy on 27th of July 2010
The RBI raises the Repo Rate (the rate at which banks borrow money from RBI for an overnight period) from 5.25 to 5.5
It has also increased the Reverse Repo rate (the rate at which RBI sucks excess liquidity from the markets) from 3.75 to 4.
The RBI seems to have gone for the rate hike for the following reasons
1) Strong IIP numbers over couple of months especially in the capital goods sector.
2) Phenomenal growth in credit offtake for banks that has risen from 10% ( October 2009) to 20% (May 2010)
3) Unabated rise in inflation numbers.
The above move comes as a part of governments plan to move out of the expansionary policy in a calibrated manner.
At this juncture it would have not been prudent to raise Cash Reserve Ratio ie CRR as currently there is a liquidity crunch in the system. The banks are nearly short of 50,000 crs of funds as a lot of money on account of advance tax payments, 3G and BWA auctions had moved from the banks into coffers of the Government. However soon this will reverse as Government pays salaries and makes other payments.
Moreover today itself the Government did a bond auction worth Rs 10,000 crs and one more bond auction worth Rs 35,000 crs is scheduled for July 28.
Thus the liquidity in the system would soon become comfortable and our EMIs may not suddenly inch up at-least not before the upcoming credit policy.
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