RBI Credit Policy Review 2011; steps to lower inflation

Mumbai, Mar 17: RBI has decided to raise the rate at which the banks borrow from each other. The RBI has also raised the rate of interest if banks borrow from the RBI. The cost on both the ends, banks borrowing from RBI and interest that banks will recieve on depositing money with the RBI, have increased in the same proportion -- 25 basis points (one percentage points reflects one-hundredth of a percentage point).

The RBI stated "Increase the repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.75 per cent with immediate effect; and increase the reverse repo rate under the LAF by 25 basis points from 5.5 per cent to 5.75 per cent with immediate effect."

This will force banks to slow down on giving out loans. A measure used by the RBI to remove excess money supply in the economy, which in theory should lower inflation.

In its review, the note was clear that RBI is worried on global factors, such as sharp increase in prices of oil due to turmoil in Middle East and North Africa.

The second cause of worry was the rise in prices of food and commodity. The central bank said it was too early to assess the macroeconomic consequences of the natural disaster in Japan. It was hopeful that as normalcy is restored, expenditure on reconstruction may provide a boost to the economy. But RBI quipped that with the nuclear disaster affecting the country, the new emphasis would be on thermal powers which will in turn increase petroleum prices to further heights.

On the domestic economy, the bank resonated concerns similar to analyst community like the continuing uncertainty about energy and commodity prices that may dampen the investment climate. This will pose a threat to the current growth rate of the country. The weak performance of capital goods in the IIP suggests that investment momentum may be slowing down.

Inflation was a standard threat, and the RBI stated that the producers are unable to pass on the cost to consumers. Oil prices too have played their role in this. It noted that food prices are still and blamed the structural problems of demand and supply.

The RBI's guidance was clear that it will keep monitoring the inflation.

OneIndia News