Press Information Bureau

Government of India

Ministry of Finance

07-September-2011 19:06 IST

RBI Increasing Policy Rates to Contain Inflation

RBI has been increasing policy rates to contain inflation and inflationary expectation to prevent the economy from getting overheated. The Reserve Bank of India (RBI) has raised the policy rate (the repo rate) eleven times by a cumulative 325 basis points (bps) since October 2009.

The increase in the Base Rates/Benchmark Prime Lending Rates (BPLRs) of banks, consequent upon increase in policy rate by the RBI, may result in increase in EMIs particularly in respect of loans which are contracted at floating rates.

Taking cues from the monetary tightening by the Reserve Bank, banks have been increasing both their deposit and lending rates. While the borrowers pay high interest rates when the lending rates go up consequent upon hike of policy rates by RBI, the Scheduled Commercial Banks (SCBs) also raise their deposit rates which have increased in the range of 25-500 basis points (bps) since March 2010 across all maturities. Therefore, higher lending rates do not necessarily mean higher profit for banks.

On an ongoing basis, Government has been providing interest subvention to certain sectors of the economy and sections of the society.

This information was given by the Minister of State for Finance Shri Namo Narain Meena in a written reply to a question raised in Rajya Sabha yesterday.

DSM/SS/SL

Policy rate increase tightens monetary conditions, prompting higher lending and deposit rates and raising borrower EMIs. The central bank raised the repo policy rate repeatedly to contain inflation, prompting banks to increase Base Rates/BPLRs and deposit rates; this transmission raises EMIs for floating rate borrowers while higher deposit costs can offset bank profitability. The government provides targeted interest subvention to certain sectors to mitigate credit cost impacts.