RBI in its second-quarter monetary policy review raised the key interest rates by 25 basis points (bps). It has also decided to deregulate, the savings bank deposit interest rate with immediate effect
In line with market expectations, RBI has raised the key interest rates by a 25 basis points (bps), to arrest the rising inflation. The move has raised repo rate to 8.5 percent from the previous 8.25 percent and the reverse repo rate to 7.5 percent from 7.25 percent while CRR was left unchanged at 6 percent. Also, the marginal standing facility stands adjusted at 9.5 percent from the previous 9.25 per cent. RBI has raised the key lending rate for the 13th consecutive time since May 2010.
In the second-quarter policy review statement, the RBI Governor D Subbarao, said the reason behind the stance is to maintain an interest rate environment that contains and anchors inflation expectations, to stimulate investment activity to support raising the trend growth and to manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission. He said “The likelihood of a rate action in the December mid-quarter review is relatively low. However, actions will depend on the evolving macroeconomic conditions.”
Shriram Ramanathan, portfolio manager - Fixed Income, Fidelity Worldwide Investment said “The announcement provides much needed stability to the bond markets and medium term fixed income investors.”
The RBI has revised the gross domestic product (GDP) growth projection to 7.6 percent from 8 percent in 2011-12. It further added that inflation, which has been over the 9 percent mark, is expected to fall from December 2011 pegging it at 7 percent by March 2012.
Considering today’s policy action, RBI governor expects three outcomes; one the medium-term inflation to remain anchored on the basis of a credible commitment to low and stable inflation, secondly the emerging trajectory of inflation, which is expected to begin to decline in December 2011, will be reinforced and, finally, it will contribute to stimulating investment activity.
Moreover, the central bank has decided to deregulate, the savings bank deposit interest rate with immediate effect. Commenting on this move, the governor said “Banks are free to determine their savings bank deposit interest rate subject to conditions that each bank will have to offer a uniform interest rate on savings bank deposits up to Rs 1 lakh, irrespective of the amount in the account within this limit. Secondly, for savings bank deposits over Rs 1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.”
Aneesh Srivastava, CIO, IDBI Federal Life Insurance said banks with low CASA (Current Account, Savings Account) would marginally benefit as currently they are wholesale funded and hence they can garner saving account through competitive pricing and their average cost of borrowings would come down. Banks with high CASA with large ticket deposits would be impacted the most till the system achieves new equilibrium.
