Mumbai: The Reserve Bank of India (RBI) on Tuesday raised key interest rates by 25 basis points (bps), as expected, tightening policy for the second month in a row as it battles inflation near double digits.
The RBI also raised its cash reserve ratio (CRR) requirement for banks by 25 bps, as expected, in a move to drain further liquidity from the financial system.
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India last month became the second Group of 20 economy after Australia to lift policy interest rates as it recovers from the global downturn, when it surprised markets with a 25 bps increase in key rates.
Asia’s third-largest economy is set to grow at 8.5% in the current financial year and 9 percent the following year, and inflation is spreading beyond food to fuel and manufactured goods such as cars. March inflation reached 9.9% year-on-year, its fastest pace in 17 months.
The RBI said its baseline scenario for economic growth in the current year is 8%, with an upside bias.
Only China is growing faster among major economies, and analysts expect the central bank to continue increasing interest rates throughout the year to bring them back towards pre-crisis levels.
“With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalizing our policy instruments,” RBI governor Duvvuri Subbarao said in the policy statement.
Indian bond markets had priced in a 25 bps rise in key rates, while some investors and analysts had expected the central bank to take bolder action to tame inflation.
The central bank lifted the reverse repo rate, at which it absorbs excess cash from the banking system, by 25 bps to 3.75%. It increased the repo rate, at which it lends to banks, by 25 bps to 5.25%.
It raised the CRR requirement for banks by 25 bps to 6.00%, which will drain Rs12,500 crore ($2.8 billion) from the system. rising to an 18-“ month high of 8.13% last Thursday.