While the economy was in full throttle last year, increasing concerns on excess liquidity and inflation saw the Reserve Bank of India (RBI) trying to steer the economy to sustainable levels through a process of rate hikes. Starting with the first quarterly review in July 2006, the RBI increased both repo and reverse repo rates by 25 basis points, the bank also raised the repo rate in October. While these failed to slow the bank credit growth of 30%, the RBI hiked the cash reserve ratio (CRR) expecting that this measure will deny circulation of Rs. 13,500 crore (USD 2.9 billion).
The measures to increase the interest rates are necessary as the quality of loans given out were degenerating quite a bit. While these measures may bring short-term sense into the financial markets, the real fix is to create a solid credit reporting mechanism which includes an electronic version of tax, borrowing, and salary levels made available to lenders who can then control their lending. At the same time, it is essential that there are stricter guidelines on scope of borrowing and modifying behavior so that moneys are withheld for speculative or wasteful buying such as for day trading or buying newer cell phones but encouraged for economy building activity such as purchase of primary homes and consumer durables.