RBI might increase repo rate to check inflation

The Reserve Bank of India (RBI) to control the high intensity of the inflation which has gone up over 7 per cent is planning to take more monetary measures including a hike in key short term rates in its credit policy on April 29.

According to top bankers there is a possibility of 0.25-0.5 per cent hike in the repo rate to supplement the 0.5 per cent cash reserve ratio (CRR) hike which announced in the last week by the apex bank.

Repo rate is the rate at which the RBI borrows from the banks while CRR is the amount of funds that the banks have to keep with the RBI.

UCO Bank's Chairman & Managing Director, S K Goel, while expressing views on RBI’s step to control inflation said, “The first priority of the Reserve Bank would be to rein in inflation. A 0.25-0.5 per cent hike in repo rates is quite possible.”

On Thursday RBI hiked CRR by 0.5 per cent to 8 per cent to suck out Rs 18,500-crore liquidity from the banking system as a measure to combat ballooning inflation.

Goel added, "The impound on Uco Bank with this CRR hike would be around Rs 400 crore while the loss of income would be around Rs 24 crore. This would have an impact on the lending surplus of the bank.”.

Goel said the bank's Asset Liability Committee (ALCO) will be holding a meeting on May 5 in which decision on lending rates will be taken.

However a 0.25 per cent hike in short-term rates can compel banks to hike lending rates passing on the burden to their customers.