India Intelligence Report



   RBI Squeezes Money Supply

  The RBI hiked the repo rate to "make money more expensive."

The Reserve Bank of India (RBI) hiked the Repo Rate to control money supply making loans more expensive and also limiting risky credit exposure in sensitive areas-this key rate is the rate at which banks lend against government bonds. After hiking the repo rate from 7.25% to 7.50%, Governor Y.V. Reddy said that banks will get money "at a higher cost" and acknowledged that this increase will "make money a little more expensive" for the common man.

The other behavioral change that Reddy wants is for banks to focus more on economically productive areas such as industrialization and not reach for low hanging fruits such as housing loans, personal consumer loans, and revolving debt such as credit card debt. These are high risk areas of loans where consumers are over-extending themselves and risk defaulting. Finance Minister P. Chidambaram revealed that the public sector banks have promised not to hike housing interest rates and are willing to absorb the rate increase in their profits.