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Two rate hikes in less than 50 dayshaven’t happened in the recent history of Reserve Bank of India (RBI). So Tuesday’s 25 basispoint hike in both repo and reverse repo rates (RBI's short term lending andborrowing rates to drain excess liquidity), coming after a similar hike on June 8, is a recordof sorts. With finance minister P Chidambaram defending the move strongly, amidannouncements by banks and housing finance companies hiking lending rates, itdoes look like we are deep in the throes of high-cost credit-ruled life.

The reverse repo has now traveledto 6 per cent from 4.75 per cent on October 27, 2004. The rep rate is at 7 percent. Although the markets had factored in the hike, many bankers and analystsfelt otherwise - as the hike was too soon, making it the sixth rate hike by RBI Governor YagaVenugopal Reddy in a space of less than two years. But the record high oil priceof $75 a barrel—"major risk to headline inflation"—and the rupee’svolatility —it touched a three-year low against the dollar last week, withfears of a rapid depreciation—simply had toinfluence the decision.

But thank RBI for small mercies: the expected50-point hike in the cash-reserve ratio (CRR), which would have put a more severecredit-squeeze and affected bank balance-sheets, did not come about. That is aswell, because on its path to increasing and full convertibility, the RBI iscommitted to cut CRR to three per cent from the fivepercent it is at now (though it has still to give out a roadmap for that, as PHDChamber secretary general Bibek Debroy points out).

Along with the rate hike, the RBIcontinues with its cautionary focus on monetary policy. It also says that itwouldn’t hesitate to give priority to "demand management, price stability,inflation expectations, and financial stability" even if "maintaining thegrowth momentum is of the highest importance." It lists the central banks thathave been hiking rates—in the US, Euro area, Japan, Canada, Australia, China,Korea and Chile—and the banks that have preferred to keep them steady—inEngland, Malaysia, Thailand and Singapore, and says that this time, it chose togo in for a modest increase.

While this focus could continue foranother year at least, interest rates are on way to peaking out. With repo ratesat 6 plus, the RBI will have to take a stand on the bank rate soon, currentlyalso at 6 per cent. Then there’s the busy season credit demand to consider.While its true that the share of housing and personal loans in overall bankcredit is 15 per cent of outstanding bank credit, there is as yet no strongevidence that all this money is chasing hot air. With companies still seeingrecord profits, corporates are depending more on internal cash, stock market oreven overseas capital. Naturally, bank credit is veering more towards retailsector.

According to a CRISIL study, until2003-04, credit growth appeared to lead GDP growth in India by four quarters.However, the relation between credit and GDP has weakened since the firstquarter of 2004-05, possibly due to this change in industrial financing. As aresult, the credit boom has not totally worked on GDP growth but instead led toasset price inflation (crazily high property rates, for instance).

Successive rate hikes have actually hada small effect on credit demand in the current year—non-food demand grew 1.1per cent in April-July compared to 5.4 per cent in the same time in 2005. Butthe trend needs to develop for some more time before the RBI can signal an endto the rate hike regime. Meanwhile, consumers should look to benefiting from thegrowing savings rates. And lenders would do better to look at the long term.