reverse-repo rate is the key rate followed by commercial
banks in setting their own prime lending rates. Markets
were divided over whether the RBI would hike or keep the
rate stable. While domestic factors like economic growth
and inflation pointed to the need for a hike, global factors
like interest rates in key economies and crude oil prices
favoured stable rates. The government has also been arguing
for keeping the rate steady to support the growth momentum.
repo rate, or the rate at which banks borrow money from
the RBI, has been hiked by 25 basis points to 7.25 per
cent. This is seen as an indication to the banks by the
RBI that they should be more careful in the management
of their liquidity positions as overnight borrowings from
the central bank would be costlier. However, as borrowings
by commercial banks from the RBI have been low, this rate
hike may not have much of an impact.
bank rate and Cash Reserve Ratio (CRR) have also been
left unchanged. The RBI has maintained the target inflation
range for the current year at 5 to 5.5 per cent while
lifting the GDP growth forecast to 8 per cent.
deadline for implementation of Basel II capital adequacy
norms has been pushed back to 2009 for most domestic banks.
Only the stronger banks would be required to implement
the norms by 2008.
host of policy announcements to grant further flexibility
in foreign exchange transaction have also been made, in
line with the recommendations of the Tarapore Committee
report on 'fuller capital account convertibility'.