RBI hikes lending rates; small depositors to get more

Clearly under pressure to help rein in galloping inflation, the Reserve Bank of India has raised key interest rates by margins that were higher than the market expected. Both 'repo' and 'reverse repo' rates have been increased by 50 basis points, or 0.5 per cent.

At the same time, small depositors have reason to cheer - the central bank has increased the rate of return from saving bank deposits by 50 basis points to 4 per cent in a gesture to the 'common man'.

This move comes amid strong indications recently that the government may decontrol SB account rates. This proposal has been opposed by some state-owned banks led by State Bank of India, which ostensibly fear that it would lead to wealthy investors getting better returns on their savings than the average depositor.

Announcing the annual credit policy of the RBI, the central bank's governor D Subbarao said the new rates were aimed at containing inflation, which is hovering around 9 per cent, and sustaining economic growth in the medium-term.

He added that fighting inflation was the priority, even at the expense of short-term growth.

The rate hike is the ninth since March 2010; but the hikes have come in small doses as the bank tries to rein in inflation without unduly affecting industrial growth.