Bankers have already hinted at a rise in interest rates as they are set to pass on the liability to the borrowers. Expecting a fall in growth and demand in the system, the Sensex plunged 568 points to 13,791.54 as rate sensitive sectors like banks, realty and auto stocks led the bear rout.

Since resuming the tightening cycle in April this year, the RBI has now delivered a 1.50 per cent CRR hike and 1.25 per cent repo rate hike. Banks had recently hiked their lending rates by 0.50-1 per cent following the last round of CRR and repo rate hikes in June.

While hiking the rates again on Tuesday, the RBI pointed to the ongoing buoyancy of aggregate demand in the economy as a source of inflationary concern as well as the strength of monetary and credit growth. Recognising that economic activity will be impacted by its actions, the RBI has moderated its growth estimate from 8-8.5% to around 8%. On the inflation front, it now aims to contain inflation to 7% levels by March 09 as compared to 5% earlier.

The RBI also referred to the budget gap posing “severe challenges” with “implications” for inflation. “This could be warning to the government that any relaxation of the purse strings may be met by additional monetary tightening,” said an analyst.

The government responded favourably to the RBI’s tough measures. “The increase in the CRR and the repo rate is a signal to the banks that credit growth must be moderated, having regard to the need to moderate aggregate demand. If requests for loans are carefully appraised and credit is allocated prudently, it is possible for the banks to ensure that adequate credit is available to the productive sectors,” the Finance Ministry said.

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