Highlights of RBI’s monetary policy

The RBI raised its key interest rates by higher-than-expected 50 bps in a bid to control inflation

The following are the highlights of the Reserve Bank of India's (RBI) Monetary Policy statement for 2011-12:

* Short term lending rate (repo) hiked by 50 basis points (bps) to 7.25%

* Repo rate to be only effective policy rate to better signal monetary policy stance from now on

* Reverse repo to be fixed 100 bps lower than the repo rate

* Short-term borrowing rate (reverse repo) up by 50 bps to 6.25%

* Cash reserve ratio (CRR) and bank rate left unchanged at 6% each

* Interest rates on savings bank deposits hiked to 4% from 3.5%

* Economic growth projected lower at 8% for FY11-12

* WPI inflation projection lowered to 6%

* Objective is to contain inflation by curbing demand-side pressures

* Favours aligning of fuel prices with international crude prices to avert widening of fiscal deficit

* Banks to get a new overnight borrowing window under Marginal Standing Facility at 8.25%

* Likelihood of oil prices moderating significantly is low

* Malegam Committee recommendations on MFI sector broadly accepted

* Bank loan to MFIs on or after 1 April 2011, will be treated as priority sector loans


RBI raises key rates by 50 basis points; hikes savings rate after 19 years

Central bank pegs GDP growth rate for current fiscal at 8% against government’s projection of 9%

The Reserve Bank of India (RBI) in its monetary policy for 2011-12 today raised its short-term lending (repo) rate by 50 basis points (bps) to 7.25% and the short-term borrowing rate (reverse repo) by 50 basis points to 6.25%. This is the ninth time that the central bank has increased its key interest rates since March 2010.

The apex bank has also increased the savings bank rate by 50 basis points to 4% from the current rate of 3.5%, a move that will give higher returns to depositors in the wake of continuing high inflation. The last time the savings rate was raised in April 1992 and since March 2003 it has been unchanged at 3.5%.

However, the RBI has lowered the economic growth projection to 8% for the current fiscal compared to 9% estimated by finance ministry. The economy grew by 8.6% in 2010-11.

RBI governor D Subbarao announced these measures as part of the annual credit policy to contain inflation, which is hovering around 9% and sustain economic growth in the medium-term.

Factoring in the many headwinds such as high inflation, which stood at 8.98% in March and rising crude and commodity prices, the governor pegged the gross domestic product (GDP) growth lower by over 1% between 7.4% and 8.5% for the current fiscal.

"High oil and other commodity prices and the impact of the RBI's anti-inflationary monetary stance will help moderate growth," Mr Subbarao said.

"Based on the assumption of a normal monsoon, and crude oil prices averaging $110 a barrel over the fiscal 2011-12, our baseline projection of real GDP growth for 2011-12, for policy purposes is around 8%," he added.

Making a highly ambitious inflation management objective, the policy aims at bringing down inflation to 4% to 4.5% for the full fiscal, with a medium-term objective of 3%.

The governor, however, said, "RBI's baseline inflation projections are that inflation will remain elevated, close to the March 2011 level (8.98%) over the first half of FY11-12 before declining."

To contain volatility in the overnight inter-bank rates, RBI has decided to open a new borrowing facility for banks under the marginal standing facility (MSF) to be effective from 7th May. The rate of interest on this facility will be 100 bps above the repo. The banks can borrow up to 1% of their net demand and time liabilities (NDTL) from this facility.

As per the above norms, the difference between the reverse repo and MSF will be 200 bps. While the repo rate will be in the middle, the reverse repo rate will be 100 basis points below it, and the MSF rate 100 bps above it, the governor said, adding the MSF rate gets calibrated at 8.25%.

On the expected policy outcome, the governor said, the policy actions are aimed at "first containing inflation by reining the demand side pressures, anchoring inflation expectations and sustaining growth in the medium term by containing inflation...going forward, the RBI will continue with its anti-inflationary stance."

The Planning Commission has endorsed RBI's hawkish policy of hiking key rates by half a percentage point saying this would contain inflation.

"Both (raising key and saving interest rates) are very good decisions. All over the world the resurgence of inflation is a matter of concern," Planning Commission deputy chairman Montek Singh Ahluwalia said.

"When inflation goes up, it is sensible to take steps early to contain inflation. I am very glad that RBI has given a clear signal going beyond the usual 25 bps (revision) to something more substantial," he added.

Mr Ahluwalia also applauded the central bank's decision to raise saving interest rate from 3.5% to 4% and said that it could also be decontrolled.

Industry reaction

Most bankers felt there was no option but to increase interest rates as the cost of borrowing funds has also gone up, with the RBI hiking the short-term lending rates.

"For a bank like ours, it (hike in interest rate on savings deposits) does (augurs well)... (People are) keeping Rs9.5 lakh crore at home in cash because of the low interest rate (on savings deposits). They are not comfortable in committing money in long-term deposit," SBI chairman Pratip Chaudhuri told reporters after the post-policy meet with the RBI governor.

Describing the annual monetary policy announced by RBI governor D Subbarao as a progressive one, Ernst & Young India's Ashvin Parekh said, "We have almost reached a point where inflation has become unmanageable and RBI has clearly indicated that bringing down inflation to a comfortable level is its top priority."

Fitch Ratings India's DK Pant opined that as inflation has been adamantly high all these months, the RBI has taken a right step to yank it down by compromising on growth, which is already visible from recent months' factory output data.

Crisil chief economist DK Joshi said: "The policy basically reflects that inflation is a much larger problem as RBI's efforts in controlling it have not had the desired effect.

We have come to a stage where managing inflation is more important, even at the cost of sacrificing growth."

The next quarterly review of the monetary policy will take place on 26th July.




6 years ago

Dear Fellow Readers,
Please consider me a person having very little knowledge and wisdom on the subject. My confusion is whether there exisist any other option or measure, available with the Govt. to curb this high rate of inflation? Inaction of Govt. can be seen that it had done nothing except upward revision of Repo, Reverse Repo, CRR, SLR etc., eight time during a year. But no result yielded. Inflation increased with every increase in Bank rate.

As per my little knowledge, inflation can also be controlled by adopting other measures e.g. by increasing supply, increasing agricultural & industrial production, reduction in unnecessary Govt. expenditure etc. Should the salaries of ministers having ministries which made impact on inflation, big beaurocrats, high officers of RBI etc. should not reduced whenever every increase in inflation is noticed? Can anybody clear my confusion.



In Reply to SUBHASH CHANDER 6 years ago

My full name is Subhash Chander Mehta. In these columns, names Subhash Chander & Subhash Mehta may please be considered as of one & the same person. Thanks.

Anil Agashe

6 years ago

RBI's 9th interest rate hike in a year half. The earlier rates have made no impact on inflation. Has the time come to stop salary increases to moderate demand? RBI intervention can have no effect on food inflation.All the money pumped through sixth pay commission and NAREGA and doubling MSP are may be responsible for food inflation. Companies are increasing prices to maintain margins and stock prices with very little relation to rise in input costs. The stimulous package of 08 was more than necessary and only helped the industry to protect their margins in auto, FMCG and White Goods sector.



In Reply to Anil Agashe 6 years ago

Yes. I am agreed with your views. Please read my comments given under these columns carefully and comment on my confusion. Whether all populist measures & heavy expenditures on ministers can be curtailed to curb Govt. expenditure? & Whether my demand for reduction of salaries and perks of ministers as well as high officers of Govt. & RBI, is justified or not?


6 years ago

Considering that inflation has been steady at about 9%, the savings interest rate should have been at least 9 % and the term deposit rates substantially higher. This would have prevented non-productive, speculative investments in gold and land raising their prices to silly heights.


6 years ago

why is government not raising the interest on Small Saving Schemes ? e.g.:PPF is still 8% and EPF subscribers enjoy higher rate, why so ?

Climate change, mitigation anyone?

What use is it to talk big things like a Green Fund and technology transfer when most of the actions on the ground require good governance and no extra money? It’s troubling to see that even as all cities in the developed world have climate change plans, Mumbai with world class aspirations cannot think beyond ‘antique’ lampposts

I read the report 'RTI inquiries reveal civic body's wasteful garden beautification plans' on Moneylife, with interest and a sense of déjà vu.

For some years now I have been very dismissive of the excessive hullaballoo over climate change and the clear lack of direction from elaborate government interactions, even as I see the most simplest of interventions being neglected in the top 20 cities of India, if not every city and town and village.

In a digital video conference at the American Center, in Mumbai, on 24th March, on the post-Cancun scenario, where I was among the participants with Andrew Light (Center for American Progress) joining in from Washington DC, one of the criticisms I highlighted was from two earlier blog entries of mine-'India's super stupid position on climate change'  and 'What's on agenda at Copenhagen?

What use is it to talk all these big things like a Green Fund and funds for technology transfer when most of the actions on the ground require good governance and no extra money? The basis for most action clearly is in integrity, which visibly is in a huge deficit in Indian polity and governance today, along with a sense of ownership and responsibility. I would say the same applies to a good section of the educated and affluent sections of Indian society also.

So should the discussions at the COP talks be more about integrity transfer rather than technology and money transfer? Not that the developed countries are the mother lode of integrity, but just to create a discussion.

And the news item on Moneylife about the unnecessary garden renovations brought me to the same conclusions. India once lived in a culture which took pride in making things run the extra mile. If a thing could be made to run for a lifetime more with a stitch, then that was the preferred option. Discarding at the first instance of damage was not the option.
All those extra lampposts and benches and electrical fittings have a carbon footprint to them. Every existing bench that was removed and will be discarded will create waste, which will have a carbon footprint as well. All the money that is wasted could have been used to make one more building green or invested in better footpaths and cycling tracks in parts of the city where none exist, planting a forest on behalf of the government, or saved for a rainy day. Even as all cities in the developed world have climate change plans, Mumbai with world class aspirations cannot think beyond 'antique' lampposts.

But there is neither any modern common sense in an information-loaded world or guidance from the tenets and beliefs of a 5,000-year glorious culture to guide Indian cities today, as they march in their profligate carbon-rich expenditures.

Like I keep saying, a full quarter of the annual Municipal Corporation of Greater Mumbai (www.mcgm.gov.in) budget (currently about Rs20,000 crore or $4 billion) is wasted. This starts with horribly wrong policies on all fronts and applies specifically to road contracts, solid waste management, shoddy quality requiring repeat contracts, etc. So much for a developing country (that can afford to waste a billion dollars a year in one city) standing with a begging bowl for technology transfer and money from developed countries-it's like saying our money is for filling Swiss Bank accounts, we need your money to do some real work.

Today's consumptive, hedonistic use-and-throw culture has clearly invaded that very government which is saying that it is concerned about climate change and its impact on people and would like to do its best for mitigation and adaptation.



Prof. Satyendra Bhandari, Ph. D.

6 years ago

Integrity Transfer - an interesting thought. Really speaking each one of us, by our lifestyle is trained to be climate (change) friendly. However, in trying to ape the wasteful rich and the famous (people and Countries) we are changing to become hostile to climate. In fact, thanks to our culture of serially reusing any article, whether clothes, utensils, shoes, paper, pen and pencil or food, so far we middle class Indians have been the saviors of the planet - but no longer so. I must highlight the life style of about a million Jains in India who use ( and never waste) nature's resources to the least. Integrity comes from within and there is need to give a serious thought at the individual level. thanks

Dr. Satyendra Bhandari - May 10, 2011



In Reply to Prof. Satyendra Bhandari, Ph. D. 6 years ago

nonsense.to reuse or not reuse something is dependent on the economic value we derive from it. a poor family finds value in reusing its meagre resources mainly because they need to stretch the budget.the rich find such reuse an opportunity cost.it has nothing to do with saving the earth or some similar hifalutin meaningless idea.the earth doesnt need your help.thanks very much.

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