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Tuesday, May 3, 2011

RBI Credit Policy 2011


Today RBI Governor D Subbarao announced the annual Credit Policy. RBI hiked the Repo Rate(the rate at which RBI lends money to banks) and the Reverse Repo Rate(The rate at which banks deposit money with the RBI) by 50 basis points to7.25% and 6.25% respectively.


These measures were taken with a view to curb the burgeoning inflation.
CRR (Cash Reserve Ratio-The proportion of a bank’s deposits which is mandatorily needs to be parked with the Reserve Bank) was untouched at 6%.


Economic growth projection was lowered to 8% for this fiscal year.
The only announcement which shall rejoice a common man to a little extent was raising the saving bank interest rate to 4%, which earlier was 3.5%.


Hike in policy rates was not at all un-expectable as inflation rate was hovering at 9% level in March and this measure is expected to bring the inflation down by easing the demand pressure.


RBIs move shall make credit dearer and as banks shall raise the interest rates for the debtors.
Dearer credit is detrimental especially for infrastructure, capital goods and heavy engineering companies, which require money for capacity expansion. Least affected companies shall be technology companies with zero or little debt.


Banks too shall have a negative impact as their NIM (Net Interest Margin-The difference between interest income and the interest expense) shall be hit badly.
If banks shall hike their lending rates then their credit growth gets hampered, apart from the fact that banks may have to raise the deposit rates.


This was a necessary step by RBI, as inflation was sure to rise further after the forthcoming hike in diesel prices, which seems inevitable due to burgeoning crude under-recovery.


Common person who has taken a bank loan at floating rate shall have to pay higher EMIs (Equated Monthly Installments) or shall have extended loan tenure.



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