RBI
hikes repo rate by 25 bps
HOUSING LOANS UNTOUCHED,
REAL ESTATE, PERSONAL LOANS UNDER LENS
February 1, 2007: Borrowing
costs are set to rise again across the board,
more sharply for commercial real estate and
capital market players, with the Reserve Bank
of India (RBI) today tightening liquidity
and targetting some sectors to check excessive
credit growth.
The RBI, in its quarterly monetary policy
review, raised its overnight lending (repo)
rate by 25 basis points to 7.50 per cent and
sharply increased bank provisioning (or risk
cover) on loans to commercial real estate,
personal loans and capital market exposure
from 1 per cent to 2 per cent, as it sought
to balance accelerated growth and inflationary
pressures, especially runaway rises in property
and equity prices. Housing loans, however,
have been left untouched.
The central bank has also not talked of bringing
inflation down to the 5-5.5 per cent target,
saying the objective at the current juncture
is to bring inflation "as close as possible"
to the target range "at the earliest"
while continuing to pursue the medium-term
goal of a ceiling on inflation at 5 per cent.
The GDP growth target has been raised for
the second time since April 2006 to 8.5-9.0
per cent.
Initial estimates by analysts put the additional
provisioning requirements at over Rs 2,000
crore. Banks are expected to pass on a large
part of the additional provisioning to borrowers
through another 25-50 basis point increase
in prime lending rates (PLRs). Banks have
raised PLRs by 75-150 basis points since April
2006.
The RBI also sought to marginally reduce the
impact of capital inflows on liquidity by
making investments by non-resident Indians
(NRIs) in deposit schemes in India unattractive.
The ceiling on interest rates for non-resident
Indian (NRI) deposits has been reduced by
up to 50 basis points.
Countering criticism that interest rate increases
would stifle growth, RBI Governor Y V Reddy
said, "High inflation dampens growth
and leads to imbalances and vulnerabilities."
Finance Minister P Chidambaram broadly endorsed
the move, saying, "Interest rate is a
small part of overall cost and I am confident
industry will go ahead with their investment
plans."
Source: Business Standard
