RBI's decision: Industry reaction

24 Jun, 2008, 2221 hrs IST, REUTERS

MUMBAI: The Reserve Bank of India (RBI) on Tuesday raised its key lending rate and the ratio of deposits banks should keep with it by 50 basis points each to curb price pressures after inflation jumped to a 13-year high in early June.

This is the second increase in the lending rate, known as the repo rate, this month. It rises to 8.5 percent with immediate effect.

The cash reserve ratio (CRR) rises to 8.75 percent from 8.25 percent, and the increase will take effect in two stages on July 5 and July 19.

COMMENTARY:

D.K. JOSHI, PRINCIPAL ECONOMIST, CRISIL, MUMBAI: "It will definitely bring down inflationary expectations. But interest rates don't impact inflation immediately. The lag is quite substantial. Not weeks, it is in months. It is aimed at controlling second-round effect of the oil price increase and also other input cost increases, such as steel prices.

"RBI was seeing inflation pressures for some time and these measures stem those expectations. This move will bring down future demand and reduce the pressures on prices."

SAUGATA BHATTACHARYA, ECONOMIST, AXIS BANK, MUMBAI:

"This was expected. The markets are going to not like this very much. This will immediately have an impact tomorrow, especially on the lower end.

"I do expect the benchmark (10-year bond yield) to climb. I don't know whether they will go up to 8.9 or so, but they might. And you will see an impact on the call money rate immediately.

"Now you will see a lot of banks raise their PLRs and a 50 bps raise is quite likely, probably more, if the liquidity situation so warrants."

EARLIER:

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI: "This is what the bond market had factored in yesterday, which was very rational and correct.

"11.05 percent is a socially unacceptable level of inflation. Whatever signals he was giving so far were not getting translated in banks raising rates. Those rates were not responding to the signals so far.

"Tomorrow you will see an across-the-board increase in banks' lending rates, which will go up by at least 75 basis points or there will be a setback to their profitability."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI:

"We were of the view that, inflation ruling at this level, anchoring demand management was the priority and as such the measures to really contain demand management are completely on the monetary policy.

"We did look at a combination of a repo rate and a CRR hike.

"RBI has always adopted a gradualist policy of 25 bps, measured, calibrated tightening. But perhaps the situation on hand is of legitimate concern, as the governor had put it, and it possibly prompted a larger dose of monetary tightening to emphatically move towards demand management."

ABHEEK BARUA, CHIEF ECONOMIST, YES BANK, DELHI:

"This is an extreme sort of measure. There was an expectation in the market of a combination of CRR and repo rate increase of 25 basis points. This is likely to have an impact on lending rates, which will go up by 50 basis points.

"The 10-year bond yield will move up to 8.8-8.9 percent and there is a possibility of spike in yields in general across the curve."

VIA:E.T