Wednesday, October 28, 2009

Interest rates set to rise, signals RBI

Interest rates are likely to start rising soon.....

Rising Inflation:

Interest rates are likely to start rising soon. This was clearly indicated by the second quarter review of the monetary policy, 2009-10, unveiled by RBI governor D Subbarao on Tuesday.

Releasing the review, the governor said that in the light of mounting inflationary pressure, which is projected to touch 6.5% by March 2010, the monetary policy's first priority would be to contain the inflationary expectation.

Repo, Reverse Repo Rate and Cash Reserve Ratio:

The RBI left all major policy rates like repo and reverse repo rates — the rates at which it lends to and accepts money from banks respectively — and cash reserve ratio (CRR) — the percentage of deposits banks are supposed to keep with the central bank — unchanged.

Easy Money :

But it took the first step towards rolling back its easy money policies, pursued for the past year to counter the economic slowdown. It terminated special liquidity facilities like credit refinance limits extended to banks against the loans given to exporters and mutual fund companies ahead of the original March 31, 2010 expiry date.

Statutory Liquidity Ratio;

The central bank also reversed its earlier decision to reduce the minimum required investment by banks in government securities from 25% to 24% of deposits. The statutory liquidity ratio is now once again 25%. As most banks have already invested more than 25% in government securities, this decision will not have an immediate impact on the availability of funds, but these measures clearly indicate the RBI's intent to discontinue the accommodative monetary policy.

Stimulus Packages:

Responding to the measures, finance minister Pranab Mukherjee said that the RBI's assessment, on the whole, is in conformity with the government's thinking on both fiscal policy and monetary policy. However, he said the government would continue with the stimulus packages till the economy is back on a firm recovery path.

Economic Growth :

Finance minister also disagreed with RBI's projection of 6% economic growth with an upward bias for 2009-10. He said he would prefer to go with the growth projection of 6.5% to 6.75% given by the prime minister's economic advisory council in its mid-year review.

Prime Lending Benchmark System:

Pranab Mukherjee further hoped that with the new prime lending benchmark system likely to be introduced soon, the lending rates would become more transparent and competitive. This would make the banks lend at lower rates with lesser margin over the cost of funds.

To read more, please, visit The Times of India

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