RBI leaves reverse-repo rate unchanged

The Reserve Bank of India has left the key reverse-repo rate unchanged at 6 per cent per annum, even while reiterating its concerns over inflationary risks. Reverse-repo rate is the rate at which the RBI absorbs liquidity from the system, or the interest rate paid to banks for RBI's borrowings from them.

The 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.

The 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.

The 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.

The 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.

A 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'.