India's Largest Database on New Projects
March 30, 2007: Interest rates on most loans, including home loans, could rise by half to one percentage point with the Reserve Bank of India announcing a slew of tightening measures today. The measures pass on the burden of managing inflation to borrowers and banks who will pay by way of higher rates and lower profits.
The move aimed at removing the froth from the economy — in the form of speculative investments and consumption demand — may end up moderating economic growth as well.
RBI’s measures include a half percentage point hike in cash reserve ratio — the part of deposits that banks have to keep with the RBI as cash — to 6.5%, and a 25-basis point hike in repo rate — the rate at which banks borrow from the RBI — to 7.75%. Also, banks will get far less returns on money parked in CRR, with interest rates on CRR halved to 0.5%.
Even before the system could digest the previous dose of tightening measures, the monetary authority has struck again. It is widely perceived that the RBI is also being influenced by think-tanks within the government.
This is the third in a series of monetary squeeze steps in four months. Incidentally, the other two hikes were announced outside the monetary policy review on December 8, 2006 and February 13, 2007. Despite these, year-on-year credit growth was 29% on March 15, 2007.
This CRR hike has dashed all hopes of any immediate easing of rates. Some banks had refrained from raising rates hoping that the RBI was at the end of its tightening phase.
Source: The Economic Times