RBI's 'Means' get their just 'Ends'... - Views on News from Equitymaster

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RBI's 'Means' get their just 'Ends'...

Feb 7, 2007

In a bid to restrict the untrammeled growth in retail credit in the form of housing finance, credit card and auto loans, the Reserve Bank of India (RBI) raised the Repo rate on January 31 (last week) to 7.5%. Repo or repurchase rate is the rate at which the RBI gives loans to banks to tide over overnight fund mis-matches. The banking sector has already lent 72% of its net deposits, and has to compulsorily invest 25% of its deposits in government securities as the Statutory Liquidity Ratio (SLR). That leaves them very tight margins to work on. ICICI Bank, the second largest banking entity in the country, finances approximately 35% of the country's retail credit requirement and is the market leader in car loan business (38% market share). Around 51% of the bank's retail portfolio is garnered through mortgage financing followed by auto loans (20%) and commercial business (12%). The bank has announced a 100 basis points hike in its Prime Lending Rate (PLR) as well as its PLR on home loans and at the same time has raised rate on its tax-saving 5-year term deposits by 125 basis points to 9.5%. The EMI for Rs 15 lakh, 15-year home loan will increase by around Rs 1,000.

Inflation in India is more a function of higher aggregate demand than cost push. Over the last decade, inflation has peaked after the Index of Industrial Production had peaked. Past four years of continuous industrial growth has raised general demand for goods and services with most asset-prices going through the roof. With banks raising their interest rates, the extremely price-sensitive Indians will now think twice about buying a new vehicle or a house for investment. And the monetary authorities will be satisfied with their target being achieved.

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