RBI eases liquidity, keeps key rates unchanged- Business News

RBI keeps rates unchanged

With a declining trend in inflation and amid reports of liquidity crunch, the central bank announced pumping in Rs 48,000 crore into the system, keeping key rates unchanged.

  • Mumbai,  December 17, 2010  
  • |  
  • UPDATED   16:06 IST

The Reserve Bank of India (RBI) left policy rates unchanged, as was expected by the markets and economists, but warned that inflation was still well above its comfort level.

It also announced steps to ease the tight liquidity conditions, which were forcing banks to borrow more than Rs 1 lakh crore from the repo window since November.

However, a lending rate hike by banks cannot be ruled out given the banks had been paying 9.25- 9.5 per cent on certificates of deposits (CDs) of oneyear maturity, much above the 7.5 to eight per cent they pay for one year fixed deposits (FDs), to tide over the cash crunch. Banks have raised their deposit rates in the range of 0.5- 1.5 per cent since the beginning of the month and a few of them have raised lending rates too.

" Much before the RBI's midquarter review, we have announced very good deposit rate offerings. We have also raised lending rates in tandem enabling effective transmission of RBI's earlier rate hikes intended to curtail the inflation spiral," said M. Narendra, chairman and managing director of Indian Overseas Bank (IOB).

IOB had hiked its base rate and benchmark prime lending rate (BPLR) by 0.5 per cent each to nine per cent and 13.25 per cent, respectively, early this month to protect its margins.

"If the inflation slides to five to six per cent range, as RBI is expecting, there might not be any further hikes in rates. But global oil and commodity prices are posing a challenge for lower inflation," Narendra added.

"There is a risk that rising international commodity prices will spill over into domestic inflation. Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation," RBI said in the review.

The equity market also welcomed the pause in rate hikes for now, taking the main indices up. The bellwether BSE Sensex, which hovered about the previous close till 12 noon on Thursday, posted a smart gain of 217 points or 1.1 per cent to close at 19,864.85 points. The NSE Nifty gained 56.45 points to 5,948.75.

Repo (at which RBI lends to banks) and reverse repo (the rate at which RBI pays for banks' overnight deposits with it) were retained at 6.25 and 5.25 per cent levels, respectively. It has retained the cash reserve ratio (CRR or the portion of deposits to be kept with the RBI) at six per cent.

To make more funds available to banks, RBI announced two steps - reduction of statutory liquidity ratio (SLR or a portion of the deposits to be invested in scheduled securities including government securities or G-Secs) by one per cent to 24 per cent and to buy back G-Secs worth Rs 48,000 crore in the next 30 days.

The first step would only result in an accounting adjustment and maintain status quo.

Buying G-Secs worth Rs 48,000 would, however, help banks reduce their overnight borrowings from the RBI. MV Nair, CMD of Union Bank of India said: "We are looking at raising base rate next week as we have not hiked lending rates along with deposit rate hike."

Courtesy: Mail Today