Mumbai, Oct. 31: Reserve Bank governor Y.V. Reddy surprised everyone today by bowling a flipper — he tweaked a little-known interest rate called the repo and left other rates unchanged as he chose to let the booming economy grow.
The decision meant that home and personal loan seekers won’t have to worry about a rate rise — at least not yet.
The repo rate — which is the interest rate that RBI charges banks for borrowings — was raised to 7.25 per cent from 7 per cent.
Reddy’s decision was dubbed a clever balancing act and left a bemused bunch of bankers trying to figure out what the move really signified. “It’s half a rate hike,” said one banker.
“It will raise the borrowing costs for banks,” said Prakash P. Mallya, chairman and managing director of Vijaya Bank. “But it will not have any impact on home or auto loans.”
The RBI upped its growth forecast for the economy to 8 per cent from its earlier projection of 7.5 to 8 per cent. In the first quarter, the economy grew at a blistering 8.9 per cent and a rate rise now would have slammed the brakes on industrial growth.
One argument in favour of raising interest rates was to tame inflation which is currently riding at 5.25 per cent. Reddy said inflation would be kept within its previously projected band of 5 to 5.5 per cent for this fiscal year.
With world crude oil prices coming off the boil, the Reserve Bank said the only cause for worry was the potential price pressures that “persist as global food and metal prices firm up”.
There were a few relaxations in capital controls: individuals have been permitted to remit up to $50,000 abroad —which is twice the earlier limit of $25,000.
Similarly, mutual funds have been allowed overseas investments up to $3 billion against the earlier level of $2 billion.
Moreover, non-residents can now remit up to $1 million (Rs 4.6 crore) in a financial year from the proceeds realised from the sale of immovable property.
Reddy also gave a set of directions to banks: first, they were told to be a lot more transparent in their practice of re-setting floating rates on home loans; second, they were asked to seek only a photograph from a person wanting to open a small bank account with a balance of less than Rs 50,000 and accept self-certification of his address; finally, it said banks could work out a one-time settlement facility for distressed farmers who have had to reschedule their loans.