Indian central bank hikes key interest rates

16:18, July 27, 2010      

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Indian central bank Reserve Bank of India (RBI) hikes repo rate and reverse repo rate by 25 basis points and 50 basis points Tuesday to contain double-digit inflation, with the release of latest quarterly review of monetary policy.

As RBI's short-term lending rate and borrowing rate to commercial banks, repo rate and reverse repo rate move up to 5.75 percent and 4.5 percent, from 5.5 percent and 4 percent, respectively.

The bold monetary tightening exceeds market estimates, which peg RBI's hike of repo rate and reverse repo rate all at 25 basis points.

RBI said its monetary policy stance is intended to contain inflation and anchor inflation expectations, maintain an interest rate regime consistent with price, output and financial stability as well as actively manage liquidity to ensure effectiveness of policy rate actions.

RBI expected that Indian headline inflation will be 6 percent by March 2011, higher from the projection of 5.5 percent in previous policy review in April.

The central bank said it will endeavor to achieve price stability and anchor inflation expectations employing an array of aggregate and disaggregate measures.

Meanwhile, RBI adjusted up baseline projection of economic growth in fiscal year 2010-2011 to 8.5 percent from 8 percent, on the ground of better industrial production and its favorable impact on service sector.

India also faces risks from uncertain global recovery, potential slowdown of capital inflow and the ongoing monsoon, said the monetary policy review.

RBI decided to double the frequency of policy reviews through introducing the mid-quarter reviews so as to catch the rapidly evolving macroeconomic situation.

So far this year, RBI has heightened repo rate and reverse repo rate by 100 basis points and 125 basis points with cash reserve ratio up 100 basis points to normalize its monetary policy.

Given the risks to inclusive growth from high inflation, the monetary unwinding since October 2009 should continue till inflation expectations are firmly anchored and inflation is brought down, said one paper by RBI on macroeconomic and monetary developments released Monday.

Additionally, Economic Advisory Council to the Prime Minister pined inflation rate at 6.5 percent by March 2011 due to expected normal monsoon combined with the base effect and called for further monetary tightening, when issuing Economic Outlook 2010 last Friday.

Source: Xinhua


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