RBI's move to contain inflation, slow down credit growth: FinMin

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On Tuesday, the Reserve Bank of India (RBI) hiked the repo rate, or the key lending rate at which the central bank lends funds to commercial banks, from 8.5 percent to 9 percent, and the cash reserve ratio (CRR) or the proportion of reserves the commercial banks must keep with the central bank, from 8.75 percent to 9 percent to tame inflation.

Though there are "signs of some moderation in money supply and deposit growth," yet inflationary pressures continue to remain high due to high food and oil prices. In addition, RBI expressed concerns about "strong credit growth" despite several monetary and prudential measures taken by it.

Some banks, RBI noted, have expanded credit rapidly in relation to the system level growth, with attendant worsening of their credit-deposit ratios.

"These developments warrant heightened policy concerns in the interest of overall systemic stability and the quality of financial intermediation," it said.

"Banks should focus on stricter credit appraisals on a sectoral basis, monitor loan to value ratios and generally ensure the health of credit portfolios on a durable basis without encountering undue asset-liability mismatches," it added.

Following the announcement, Reddy said he did not expect the people to react positively. "Every time a medicine is given people find it bitter, but in the end everybody wants to be healthy," he said.

And, true to Reddy's remark, RBI's move came as a shock to the market, which plunged over 500 points on Tuesday.

While market analysts claim the hike would lead to a "macro deterioration" and slowdown of "investment demand and growth," apex industry chambers feel the hike "could have a further negative impact on the southward movement of industrial activity," "lead to a fall in the overall business confidence," and "impact the investment momentum and corporate cash flows."

However, the finance ministry has backed RBI's move, saying the hike should have a sobering effect on demand, particularly in areas of credit growth and credit-deposit ratio.

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