Reserve Bank of India raised interest rates for the sixth time this year on Tuesday to tame inflation, and indicated that the increase was likely to be its last in the near term. The Reserve Bank of India raised its lending and borrowing rates by 25 basis points each, as expected by most analysts.
The RBI lifted the repo rate, at which it lends to banks, to 6.25 per cent and raised the reverse repo rate, at which it absorbs excess cash, to 5.25 per cent.
“Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low,” Reserve Bank of India Governor Duvvuri Subbarao said in his second quarter monetary policy review.
As expected, the RBI left the cash reserve ratio unchanged at 6 per cent.
The central bank said in a report on Monday that inflation remained “above the comfort level”, similar to comments from Finance Minister Pranab Mukherjee, who said inflation was a matter of concern.
Wholesale inflation rose to 8.62 per cent in September on higher food prices from 8.5 per cent in August. It was in double digits for six straight months through July.
Asia’s third-largest economy is on track to grow at 8.5 per cent in the fiscal year that ends in March.
RBI rate hike aimed to curb inflation: Montek
The Plan panel on Tuesday said RBI’s move to hike short term rates by 25 basis points is on the expected lines and is aimed at curbing inflation without hurting growth. “This adjustment (by RBI) is a good balance between responding to inflationary concerns, which is very important and at the same time not doing anything that would in a serious way disrupt growth,” Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters.
The Reserve Bank on Tuesday hiked its key short-term lending and borrowing rates by 25 basis points each with immediate effect to rein in inflation, a move that could increase banks’ commercial lending rates.
Accordingly, the short term lending rate (repo rate) stands at 6.25 per cent and the borrowing rate (reverse repo) at 5.25 per cent.
While RBI maintained that managing inflation would remain a challenge, it has pegged FY’11 inflation at 5.5 per cent. The overall inflation for September was 8.62 per cent, much higher than the acceptable level of 5-6 per cent.
Ahluwalia said there would be some downturn in inflation in future. “It would be in a comfortable zone when the WPI data for December would be available in mid January,” he said.
So far, this year the RBI has hiked the repo rate by 125 basis points and the reverse repo by 175 bps to tame inflationary pressure, by curbing consumer spending.
However, in its Tuesday’s policy review it has said that the likelihood of further rate actions in the immediate future is relatively low.
“The RBI action is in line with what many central banks (are) doing in other emerging markets. I see this more as a signal of getting back to normal interest rate regime,” Ahluwalia said.