Credit Policy: RBI raises policy rates, CRR by 25 bps

In its annual credit policy review, the Reserve Bank of India raised the repo, reverse repo rates and the CRR by 25 basis points each. This means that the CRR is hiked to 6% from 5.75%, the reverse repo is raised to 3.75% from 3.5% and the repo is increased to 5.25% from 5%. The policy rates are effective immediately, while the CRR hike will be effective from April 24. The CRR hike is expected to take away Rs 12,500 crore from the system.

The hikes are broadly in line with street expectation, although a section of the market was expecting a 50 bps hike in the CRR. Following the benign hikes, markets have started witnessing a relief rally, both in bonds and equities.

The RBI expalined it dovish step by saying it wants to normalise policy rates in a calibrated manner. The much awaited paper on bank licenses for the private companies will be prepared by July-end. By end of June, the bank proposes to prepare the draft for CDS introduction. Around the same time, it will finalise OTC forex derivatives norms. The apex bank's FY11 GDP forecast stands at 8% with an upside bias while March 2011 inflation is projected at 5.5%. "Keeping in view domestic demand-supply balance and the global trend in commodity prices, the baseline projection for WPI inflation for March 2011 is placed at 5.5%," the report said.

Addressing the press post policy announcement, Reserve Bank Governor D Subbarao said the banks welcomed the policy stance saying that government borrowing would not crowd the private sector. However, he was quick to add that the FY11 government borrow size might put pressure on interest rates and also that banks were concerned about rise in infra exposure. ''They reiterated the need to supplement infra funding.''

Uncertainty over the shape of global recovery still persists, he said, adding, ''Inflation has become more generalised''.

Expected Outcomes