Rising global commodity prices, particularly oil, has forced the Reserve Bank of India (RBI) to raise the red flag again on inflation and growth in its mid-quarter monetary policy review. To tackle the rising inflationary trend, the RBI has upped the interest rate at which it injects liquidity into the banking system by 25 basis points to 6.75 per cent (repo rate) and the interest rate at which it absorbs surplus liquidity from the banking system by 25 basis points to 5.75 per cent (reverse repo rate).
The central bank sharply revised upwards its inflation projection for March-end up to about 8 per cent from 7 per cent, even as it warned that the investment climate could get vitiated, thereby posing a threat to the current growth trajectory. This is the second time in the current fiscal that the RBI has revised its inflation projection.
Banks are unlikely to raise deposit rates in response to the hike in key short-term rates. Deposit rates appear to have reached a peak. In order to protect their margins, banks are expected to up their lending rates by about 25 basis points. Lending rates have not moved up as much as deposit rates in the last few months.
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