M A I N   N E W S

RBI raises savings interest to 4%
Monetary policy gives precedence to fighting inflation over growth; Sensex falls 463 points
Sanjeev Sharma
Tribune News Service

Policy shift The policy will make housing and auto loans more expensive and dent the profitability of banks and other financial institutions. The policy favours aligning of fuel prices with international crude prices to avert widening of fiscal deficit. Banks will weigh passing on this burden to lenders and also levying charges on transactions done by customers to mitigate the hit on bottom lines. The industry also frowned on the move and CII said that rising interest rates will now begin to have a dampening impact on investment sentiment

New Delhi, May 3
The interest rate regime now seems to be tilting in favour of savers. In a comprehensive annual monetary policy announced today, the Reserve Bank of India (RBI) today raised savings bank interest rates after almost two decades from 3.5 per cent to 4 per cent. This will benefit crores of bank account holders. RBI also hiked benchmark rates 50 basis points to give precedence to fighting inflation over growth in the economy. The move is expected to raise home and auto loan rates and dampen demand for these products.

RBI hiked the repo rate (the rate at which banks borrow from the RBI) by 50 basis points to 7.25 per cent, the ninth increase since March, 2010. The repo rate will now also become the single benchmark rate to signal monetary policy.

RBI Governor D Subbarao said that containing inflation would take precedence over growth, which has been pegged at a lower level of 8 per cent for 2011-12 against the government’s projection of 9 per cent. He warned that there are “concerns about inflation expectations becoming unhinged” and called for raising petrol and diesel prices.

“Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the Reserve Bank believes that this needs to be done as soon as possible,” he said.

The major surprise was the increase in savings interest rate which is the only rate, which has not been deregulated. Last week, the RBI had floated a paper on deregulation of the rate and the move to increase rates is being seen as a precursor to eventual freeing of savings rate.

It will, however, hit the profitability of banks, especially PSU banks which have a higher deposit base but are not as nimble as private sector players. Banks will weigh passing on this burden to lenders and also levying charges on transactions done by customers to mitigate the hit on bottom lines.

The hike in the repo rate and the savings rate will lead to an increase in the credit as well as the deposit rates. While depositors will rejoice, consumers who have home, auto and personal loans will have to shell out higher EMIs and demand in these sectors may be dampened with consumers deferring purchases.

The industry also frowned on the move and CII said that rising interest rates will now begin to have a dampening impact on investment sentiment.

The stock markets were taken by surprise by the 50 basis points increase and the BSE Sensex fell by almost 463 points. Banking shares were among the biggest losers.