RBI ups key interest rates by 25 bps to tame inflation

Continuing its hawkish monetary stance to curb high inflation, the Reserve Bank of India (RBI) Thursday hiked short-term lending rates by 25 basis points, the tenth time it has raised interest rates since March 2010.

The repo rate was raised by 25 basis points from 7.25 percent to 7.5 percent with immediate effect.

"The challenge of containing inflation and anchoring inflation expectations persists," said the RBI in the mid-quarter monetary policy review.

As per the structural changes announced in the monetary policy for 2011-12, the reverse repo rate stands automatically revised to 6.5 percent.

"While the Reserve Bank needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory," the RBI added.

Latest data showed that annual inflation rose to 9.06 percent in May, compared to 8.66 percent in the previous month.

Other policy rates such as the statutory liquidity ratio and the cash reserve ratio -- the minimum quantum of money against deposits which the banks have to retain as cash or specified government securities -- have been left untouched.

The bank rate also remains unchanged at 6 percent.

Highlights of mid-quarter review of RBI monetary policy

-- Repo rate hiked by 50 basis points to 7.5 percent

-- Reverse repo automatically revised upwards to 6.5 percent

-- Marginal standing facility rate increased to 8.5 percent

-- No change in other statutory rates

-- Deceleration in some interest-sensitive sectors such as automobiles, no evidence of any sharp or broad-based slowdown

-- Baseline projection for GDP growth for 2011-12 maintained at around 8 percent

-- Domestic inflation remains high and much above the comfort zone of the Reserve Bank

-- Non-food manufactured products inflation is a matter of particular concern, suggests more generalised inflationary pressures

-- Impact of the recent monetary policy actions is still unfolding

-- RBI says rate hike will contain inflation by reining in demand side pressures and anchor inflation expectations

-- RBI says actions expected to mitigate the risk to growth from potentially adverse global developments

-- RBI will persist with its anti-inflationary stance of monetary policy

-- Although global commodity prices have moderate they still pose a risk to both domestic growth and inflation

SME Times News Bureau | 16 Jun, 2011