The RBI on Tuesday(20-04-10) hiked short-term lending and borrowing rates(Repo and Reverse repo Rates) and the portion of money banks deposit with it by 25 basis points each, in a move aimed at controlling the double digit inflation.
The below list shows the present and increased key rates:
| Policy Rates/Reserve Ratios | Present rate | Increased rates |
| 1. Bank Rate | 6.00% | Unchanged |
| 2. Repo Rate | 5.00% | 5.25% |
| 3. Reverse Repo Rate | 3.50% | 3.75% |
| 4. Cash Reserve Ratio | 5.75% | 6.00% |
| 5. Statutory Liquid Ratio | 25.0% | unchanged |
Cash Reserve Ratio (CRR) is the amount of funds that the banks have to keep with the Reserve Bank of India. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The hike in CRR, which will come into effect from April 24.
As a result of the increase in the CRR, about Rs 12,500 crore of excess liquidity will be absorbed from the banking system.
With the RBI deciding that banks now need to increase the amount of cash they have to keep with the central bank (the cash reserves), the problem is that banks will not earn any interest on this amount.
So banks will be left with little option but to hike interest rates to make up for that loss of interest they would normally have earned had CRR been lower.
So Home loan, car loan and personal loans are likely to rise marginally that might burden for the common man.
Why RBI was forced to hike rates?
The RBI said that the Indian economy is firmly on the recovery path. Exports have been expanding since October 2009, a trend that is expected to continue.
On balance, under the assumption of a normal monsoon and sustenance of good performance of the industrial and services sectors on the back of rising domestic and external demand, for policy purposes the baseline projection of real GDP growth for 2010-11 is placed at 8.0 per cent with an upside bias.(Inputs from: Rediff)
Assuring that the policy actions would not halt the recovery, the RBI pegged the FY'11 GDP growth at 8 per cent. It also pegged the wholesale inflation, which is currently hovering close to the double-digits (9.9 per cent in March), at 5.5 per cent for FY' 11.
