RBI hikes key rates by 25 bps, frees up bank savings rate

The Reserve Bank on Tuesday chose to continue withits tight monetary stance and raised interest rates by 25 basis points - 13thtime since March, 2010 - to tame inflation, even as it lowered the growthtarget to 7.6 per cent for the current fiscal.

In a major policy decision, Reserve Bank Governor DuvvuriSubbarao also deregulated savings bank deposit rates with immediate effect.

"Changing the policy stance when inflation is still farabove the tolerance level entails risks to the credibility of the Reserve Bank'scommitment to low and stable inflation," the policy document said, even asit admits that growth momentum has slowed down.

It said inflation will start cooling by December this yearand is likely to come down to 7 per cent by March, 2012.

Tuesday's hike is the 13th since March, 2010. The series ofrate hikes has cumulatively increased interest rates by 525 basis points.

The policy is expected "to continue to anchor mediumterm inflation expectations", while stimulating investment activity tosupport growth.

Borrowers, who are livid at repeated rate hikes, can heave asigh of relief as the RBI hinted at a reversal of policy stance by saying thelikelihood of a hike in December is "relatively low".

The Reserve Bank of India (RBI) has kept other key rate andratio - bank rate and cash reserve ratio (CRR) - unchanged at 6 per cent each.It also retained the statutory liquidity ratio (SLR) at 24 per cent.

Factors like weakening global macroeconomic outlook and highdomestic inflation will pull down the economic growth rate further, RBI saidwhile lowering the GDP forecast for the current fiscal to 7.6 per cent from itsearlier projection of 8 per cent.

The risks to the policy emanate from worsening global macroscenario, commodity prices and increase in government spending which couldcrowd out private investment, it said.

An important policy decision RBI announced today is thefreeing of savings bank deposit rates with immediate effect, the last bastionof the regulated interest rate regime.

Earlier in May, RBI had raised the savings deposit rates to4 per cent from 3.5 per cent.

Giving banks the freedom to fix the savings accountsinterest rate, RBI said banks will have to offer uniform rate on deposits of upto Rs one lakh. On higher amounts, they can give differential rates todepositors.

It has also permitted commercial banks to open branches intier II cities without prior approval of RBI.

The Reserve Bank has also proposed to notify banningprepayment penalty on floating rate home loans, as recommended by the BankingOmbudsman recently.

The policy document further said that RBI will issue thefinal guidelines on credit default swaps by November-end.

As banking system prepares to go on to the Basel-IIIframework requiring higher capital adequacy, the RBI said the draft guidelinesfor its implementation will be issued by December-end.

As regards the micro finance sector, RBI has given thego-ahead for creating a new category called NBFC-MFIs (NBFC-Micro financeInstitutions).