RBI hikes key rate to check inflation; interest rate may go up

RBI hikes key rate to check inflation; interest rate may go up Home, consumer and other loan rates are expected to go up with Reserve Bank announcing a hawkish credit policy hiking key short-term lending rate by 0.5 pc and mandatory cash reserve requirement by 0.25 pc to contain runaway inflation now at 11.89 pc. The 0.5 per cent hike in Repo rate, Reserve Bank's overnight lending rate to banks, would come into effect immediately, while the 0.25 per cent increase in CRR, the percentage of amount banks are required to park with the apex bank, would be effective from the fortnight beginning 30th August, 2008. In its first quarterly review of its annual monetary policy this fiscal, the RBI also lowered economic growth projection to 8 per cent from its earlier forecast of 8-8.5 per cent in the face of difficult global economic situations. RBI Governor Y V Reddy said that the main thrust of the policy would be to bring down inflation to 7 per cent by March, 2009 from the high 11-12 per cent, at present. Earlier, the apex bank had set the attempt to bring down inflation close to 5 per cent by end of this fiscal and lower it further to 4-4.5 per cent with a medium-term objective of 3 per cent. The Reserve Bank said the surge in inflation reflected a combination of forces. It included pass-through of global crude prices to domestic prices, inflationary pressures due to increasing global prices of key-commodities coupled with upward pressure in domestic prices. "There are, however, some signs of moderation in key monetary and banking aggregates in response to monetary measures, which have withdrawn liquidity from the system and tightened interest rates across the term-structure," RBI said. The deepening financial turbulence in major financial centres has worsened the macro-economic outlook further by erosion of consumer and business sentiment and tightening of financing conditions with indications that a generalised credit squeeze may take hold, RBI said. The current situation, RBI said, it was necessary to moderate monetary expansion and plan for a rate of money supply growth at around 17 per cent in 2008-09 in consonance with the outlook on growth and inflation so as to ensure macroeconomic and financial stability. While RBI hiked Repo and CRR, it left untouched the bank rate and Reverse Repo rate, at which banks park their excess liquidity with central bank, at 6 per cent. The mid-term review of the annual policy will announced on 24th October, it said. It said the overriding priority of the monetary policy was to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.

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