With the next quarterly policy review due by month end, the Reserve Bank of India has raised the interest rates by 25 basis points. The announcement to this effect was made on Friday after the financial markets closed for the weekend. The central bank attributed the rate hike to runaway inflation that is turning ‘very much generalized’ with demand-side pressures becoming evident.

The RBI raised the reverse repo rate from 3.75% to 4% and repo rate from 5.25% to 5.5%. This is the third time this year that the central bank has increased the interest rates.

The country’s wholesale price inflation (WPI) breached the 10% mark in May, even as industrial production surged ahead with a 17.6% increase in April. Moreover, the government’s recent decision to deregulate petrol prices and partially deregulate diesel prices is believed to further worsen the inflation situation.

“Although entirely justified in terms of long-term fiscal and energy conservation objectives, the recent increase in fuel prices will have an immediate impact of around one percentage point on WPI, with second-round effects being felt in the months ahead,” said a RBI release.

Though RBI announced the rate hike, the banks are in no hurry to raise their base rates. The base rate is the lower limit fixed for each bank below which it cannot lend.

The Finance Minister Pranab Mukherjee expressed his happiness at the latest RBI move. He termed RBI measure as ‘desirable given that core inflation has risen and credit situation is tight’. He is also satisfied that RBI has not hiked the cash reserve ratio (CRR) of banks.

“The measures should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process,” an RBI statement said. “The Reserve Bank will continue to monitor the macroeconomic conditions, particularly the price situation, and take further action as warranted.”

Economists are expecting a similar policy rate hike during the quarterly policy review scheduled on July 27.

The banking sector’s benchmark, prime lending rate (PLR), had been in the center of controversy for long, which prompted RBI to constitute a panel to look into the issue in detail. According to the panel’s recommendation, the PLR system is being abandoned and a new system based on base rate is being introduced. One of the advantages of base rate system is that it will make lending process more transparent.

O P Bhatt, Chairman, SBI, India’s largest bank said, “The base rate will be transparent. Credit will henceforth revolve around the base rate as it will be the reference rate over which all loans will be priced and it will succeed in monetary transmission.”

One of the perennial complaints against PLR system was that many private sector banks were not passing on the reduction in policy rates to customers, but lose no time when the policy rates are hiked. This equals nullifying the monetary policy. The banks are also accused of favoring their corporate customers at the cost of individual customers and smaller companies, with the latter forced to bear the financial consequences. Many banks are lending lower than even funding cost to their most valuable clients.

A base rate system can solve the existing maladies plaguing the banking sector at present. The base rate is the rate below which a bank cannot lend even to their most favored customers. This is determined after analyzing a bank’s funding cost and operating cost.

With the base rate system coming into effect today, Indian banks will be forced to stop lending below 7%. The base rate for different banks will be in the range of 7%-8.75%, depending on each bank’s funding cost.

Rabobank International announced on Tuesday the sale of 37.3 million shares of Yes Bank Ltd, constituting 11% of the bank’s total holding. The transaction will reduce Rabobank stake in Yes Bank to 4.9% from the previous 15.9%.

The Dutch bank sold the stake to a group of domestic and international institutional investors, which includes DSP Blackrock Investment Managers Pvt Ltd, Birla Sun Life Asset Management Co Ltd, Life Insurance Corp of India and Citigroup Global Markets Mauritius Pvt Ltd. All the four investors bought above 1% stake at Rs 263 per share.

Sipko Schat, vice-chairman, Rabobank clarified that the bank would retain a minority stake of 4.9% in the Indian bank. However, Mr. Schat said that he would step down from the bank’s board. Mr. Schat is Rabobank’s sole representative on the Yes Bank board.

The Dutch bank’s latest move is said to comply with the RBI directive, which states that a single investor cannot own more than 5% stake in a bank. Rabobank had earlier sought approval from RBI to open a branch in India, which is pending with the central bank. It is believed that RBI had put its foot down regarding ownership of above 5% stake in Yes Bank by laying it as a precondition for opening a branch in the country.

Rabobank had 20% stake in Yes Bank, when it began operation in May 2004. The holding was reduced to 15.9% when the Indian bank raised capital through qualified institutional placement. The Dutch bank was bound by agreement to remain invested for a period five years, which elapsed in May 2009.

Yes Bank officials declined to comment on the developments, directing relevant queries to Rabobank.

The Telecom Regulatory Authority of India (Trai) and the Reserve Bank of India (RBI) have arrived at an agreement regarding the launch of mobile banking in the country. While Trai will take care of the interconnection part, RBI will handle the banking component of mobile banking. This includes maximum daily transaction limit, know-your-customer guidelines and verification criteria.

Earlier, there was apprehension among telecom operators of getting entangled in the regulatory issues, especially after the SEBI-IRDA fiasco regarding the regulation of unit-linked insurance products (ULIPs).

Trai, with its in-depth knowledge of telecom sector, is the perfect authority to workout interconnection technicalities, which involves linking telecom networks with that of banks. The points to be sorted out include service charge payable to the telecom provider for mobile banking access and the number of points of interconnection.

Mobile banking confirms to government’s policy of inclusive growth. In rural areas, mobile telephony has made deep penetration to the point that there are more mobile users than bank account holders. This unusual state of affairs can be turned around to the advantage of all concerned by using mobile services to improve access to financial services.

With mobile banking in place, rural folks can withdraw or transfer money using mobile phones. However, concerns regarding vulnerability of carrying out financial transactions through mobile phones still remain, as pointed out by RBI governor D Subbarao recently. He had suggested a bank-led arrangement as a means to avoid cyber crime such as phishing, identity theft and misuse of personal information.

RBI had issued guidelines for mobile banking as early as October 2008 and almost 32 banks have obtained clearance to provide related services. With the approval for mobile banking already in place, the government has set July 31 as an informal date for launch of services.