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RBI hikes policy rates by 25 bps to fight inflation

RBI hikes policy rates by 25 bps to fight inflation
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First Published: Fri, Mar 18 2011. 01 15 AM IST
Updated: Fri, Mar 18 2011. 09 42 AM IST
Mumbai: The Reserve Bank of India, or RBI on Thursday increased its overnight lending and borrowing rates by a quarter percentage point each to control high inflation, which has already begun hurting the common man.
The RBI hiked its repo rate or the rate at which it infuses money into the banking system to 6.75% and reverse repo rate, at which it sucks out excess money, to 5.75%.
With the latest round of 25 basis point (bp) hike, the apex bank has hiked its short-term rates eight times since March 2010 to battle high inflation. One bp is one hundredth of a percentage point.
“Based on the current and evolving growth and inflation scenario, the Reserve Bank is likely to persist with the current anti-inflationary stance,” the RBI said..
Immediately after the announcement, the benchmark sensex was trading 62.11 points down at 18,296.58 points while the yield on the most traded 8.08 % government bond maturing in 2022 remained largely unchanged at 8.07%.
The headline inflation, which is still above the central bank’s projection of 7% for the fiscal year ending March, 2011, rose to to 8.31% in February, from 8.23% the previous month, defying forecasts of a slowdown. RBI has raised its projection for March inflation to 8%.
In the past one year, the central bank has hiked is repo rate by 175 bps from 5% to 6.75% and reverse repo rate by 225 bps from 3.5% to 5.75%.
Last week, Reserve Bank governor, D Subbarao said the central bank is struggling to support growth while controlling the high inflation.
“We are struggling with growth-inflation dynamics,” Subbarao lasst week. “For inflation management, we have to raise policy rates. For protecting, promoting and preserving recovery, we need to keep interest rates low. So there is tension between raising interest rates and keeping them low.”
In its January policy, while raising its inflation projection, RBI also warned off a possible spillover of high food and energy prices to more generalized inflation.
Annoucning the policy, the apex bank said it is “too early to assess the macroeconomic consequences of the natural disaster in Japan” but it may put further pressure on petroleum prices.
“As normalcy is restored, expenditure on reconstruction may provide a boost to the economy. However, substitution of thermal for nuclear energy in Japan may exert further pressure on petroleum prices,” the RBI said.
Further, continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory to the domestic economy, the RBI said.
”In particular, the weak performance of capital goods in the IIP suggests that investment momentum may be slowing down,” it said
dinesh.n@livemint.com
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First Published: Fri, Mar 18 2011. 01 15 AM IST
More Topics: India | RBI | Monetary Policy Review | CRR | Repo |