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    RBI announces Credit Policy

    India's central bank, Reserve Bank of India (RBI)announced credit policy today. In a battle against the high inflation rate and soaring prices, RBI has increased some of the key rates.

    Conducting the review of the first quarter of 2010-2011, RBI Governor D. Subbarao raised the repo rate by 25 basis points bringing it to 5.75% and the reverse repo rate by 50 basis points bringing it to 4.50%.

    Starting Jaunary 29,2010, this is the fourth such hike by the central bank trying to curb the inflation and suck out the excess liquidity in the economy. Currently the inflation stands at 10.55%.

    The other key rates like cash reserve ratio (CRR) and statutory liquidity ratio (SLR) remained untouched and are kept at the current levels i.e. at 6% and 25% respectively.

    Repo rate is basically the rate at which the central banks gives *****/borrowings to the commercial banks. Raising this, increases the costs of borrowings of the commercial banks and discourages them to hunt for more funds.
    Bank rate and repo rate are similar, the only difference being repo rate is a short term measure and the bank rate is a long term measure.

    Reverse repo is the rate at which the central bank borrows money from the commercial banks. A hike in this makes it more lucrative for the commercial banks to park their money with the central bank.

    According to D.Subbarao, the credit policy announced will help to -
    1. Moderate the increasing inflation
    2. Maintaining financial conditions conducive for growth.
    3. Generate proper liquidity conditions in the economy.
    4. Reduce the volatility in the short term rates.

    The bank revised its projection on inflation for the end of March 2011 from 5.5% to 6%. However the good news is they also projected the country's gross domestic product (GDP) at 8.5% which was projected at 8% earlier.
    ...being a human...



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