The Telegraph
Since 1st March, 1999
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Price war activates rate alarm
- RBI targets inflation, loans set to cost more

Mumbai, Feb. 13: Prices and polls have conspired to deliver a knockout punch on Generation Loan, the growing class of young professionals who buy now and pay later.

Hounded by rising prices in the middle of an elec- tion season, the RBI today raised a key rate that is expected to suck as much as Rs 14,000 crore out of the system.

The cash reserve ratio (CRR) — the portion of deposits banks will have to park with the RBI — will go up by 50 basis points to 6 per cent in two instalments on February 17 and March 3, the bank announced this evening. When the CRR is raised, banks will have to keep with the RBI more money, which will shrink the amount available for loans.

Inflation (6.58 per cent in January last week) is now at a two-year high but few banks were expecting a direct intervention by the RBI so soon as the central bank had raised the same rate two months ago. This is the first time in recent memory that the RBI has raised the rate twice in such a short span.

If the desperate attempt works, it should bring down food prices, the principal contributor to the inflation surge that has become a hot political issue.

Exit polls have painted a mixed picture in Punjab that voted today but the ruling Congress is worried that rising prices could tell on its performance.

“Given the rapid succession with which the CRR has been hiked after it was raised last in December, it seems the government wants instant results,” an official of an international bank told PTI.

Even if prices come down, it will take some time and a matching retreat in the rates is not usually announced with the alacrity with which they were raised.

In the interlude, loans across the board are expected to cost more as most public sector banks are certain to raise their rates. State-run banks have been holding fire on the request of finance minister P. Chidambaram.

Banking circles said SBI, Bank of Baroda and Bank of India, which have not yet revised their interest rates, are likely to undertake a “review’’ of interest rates soon.

A silver-lining is the possibility of a rise in deposit rates, which should cheer savers. But an analyst pointed out that if credit growth is checked — the objective behind the RBI move — banks will not be under pressure to attract more deposits through higher interest rates.

However, spurred by rosy projections, if consumers and industry keep borrowing more, the banks will have little option but to increase deposit rates. The earlier CRR increase had drained around Rs 13,500 crore from the system but that does not seem to have had an impact on the cash pool.

Earlier in the day, RBI deputy governor Rakesh Mohan told a conference that inflation is a “tax on the poor”. He added that ensuring price stability was a societal compulsion but few expected the bank to act within a few hours of the speech.

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