Reserve Bank on Tuesday (29th July 2008) announced tough policy measures to contain inflation, a move that industry watchers say would lead to hike of up to one per cent in interest rates.

To bring down inflation from its current levels of around 12 per cent , the central bank raised banks' Cash Reserve Ratio by 0.25 per cent and short term lending rate to banks or repo rate by 0.50 per cent.

The CRR has gone up for the fourth time this fiscal and repo rate the third time, the RBI now plans to remove up about Rs 8,000 crore from the banking system to moderate credit growth. RBI, which does not see inflationary pressures easing during the next few months, has so far this fiscal taken steps to suck up about Rs 50,000 crore of liquidity.

Preferring moderation of liquidity to curb price rise, the central bank lowered economic growth projection to eight per cent from 8-8.5 per cent, while raising inflation target to seven per cent from the earlier estimate of 5-5.5 per cent.

Bankers said interest rates for borrowers could increase by up to one per cent, while apprehending that the apex bank could further tighten the screw in the next round of review.
UCO Bank Chairman SK Goel said: "Lending rates would go up by 0.5 to one per cent." Echoing the views, top officials of most nationalised and private banks, including ICICI's Chanda Kochhar, said that they would be forced to review the rates in view of the increasing costs.

RBI, however, left untouched the bank rate, the key lending rate to banks, and Reverse Repo rate, at which banks park their excess liquidity with central bank, at 6 per cent.