RBI hikes CRR, Repo rate

In what may be described as an attempt to put a check on the spiraling inflation, which zoomed to a record 11.05%, the highest in 13 years last week, the Reserve Bank of India hiked the key rates on Tuesday evening. While the Repo Rate was raised by 50 basis points to 8.5%, the highest since 2000, the Cash Reserve Ratio too saw a 50 basis point increase to 8.75%. Repo Rate is the rate at which RBI lends money to other banks.

The apex bank has said that the CRR hike will be implemented in two stages-the first of 25 basis points will be effective from July 5 and the remaining half from July 19.

Announcement of hiking the rates comes close on the heels of RBI Governor Y V Reddy discussing with Prime Minister Manmohan Singh and Finance Minister P Chidambaram the prevailing inflation scenario.

The RBI’s attempt to suck liquidity from the market by increasing the cash reserve will have a direct impact on the interest rates on home and retail loans, which are expected to rise. While the apex bank described it as a painful measure “forcefully” taken due to rise in oil prices, it also expressed hope that the measure would rein the galloping inflation.

In a precursor to raising the CRR from 8.25 per cent to 8.75 per cent in two installments beginning July 5 and the Repo Rate from 8.0 per cent to 8.5 per cent with immediate effect, Reddy had said on Monday that the apex bank would do every thing to ease the inflationary pressures.

Expressing concern over rising inflation, RBI said, "Besides oil prices there are some underlying inflationary pressures impacting inflation in India."