The Reserve Bank of India, in a landmark policy announcement on Diwali eve, deregulated savings bank deposit interest rates with immediate effect even as it raised the policy repo rate by a quarter per cent for the 13th time on Tuesday.
For deposits of up to `1 lakh banks will have to have uniform interest rates, which the RBI governor, Dr D. Subbarao, said “would be friendly to low-income households” and support financial inclusion. He, however, refused to say whether there would be a floor rate so that interest rates would not go below a certain level in times of surplus liquidity as this would hurt the poor most. Another welcome pro-people move, which is not in the policy but which the RBI governor discussed with the bank chiefs when releasing the Second Quarter Review of Monetary Policy 2011-12 on Tuesday morning, was waiving the penalty that used to be imposed by banks on pre-payment of loans. He said he has asked the banks to do this as soon as possible.
The policy also increased the individual housing loan that urban cooperative banks can give and enhanced the maximum repayment period of housing loans from 15 to 20 years. The RBI is also setting up a working group to look into principles governing proper, transparent and non-discriminatory pricing of credit. The biggest relief in this policy was an indication that there could be a pause in interest rate hikes as the RBI sees inflation beginning to decline from December 2011. This should be music to the ears of captains of industry who were very critical of what they felt was the strangulation of growth by the RBI’s relentless interest rate hikes. The stock market shot up over 300 points in a thumbs-up to the credit policy.
In today’s unstable and uncertain financial global scenario anything could happen by December to interrupt the RBI’s trajectory of inflation beginning to taper off to reach seven per cent by March 2012. Besides, it has also revised GDP growth downwards to 7.6 per cent for 2011-12 from eight per cent. Domestically, the biggest risk comes from the non-performance and policy paralysis of the government. The governor highlighted facts like structural imbalances in agriculture, particularly in protein items like milk, eggs, fish and meat, which the government needs to focus on, infrastructure, distorted administered prices of several key commodities, hidden inflation as actual costs, fuel and coal prices not reflected in prices to the end consumer, and the burgeoning fiscal borrowings of the government, which the governor said could see a surge in inflation if there is moderate growth recovery. On the happy note of the possibility of this being the last rate hike, we wish our readers a happy and prosperous Diwali.