India’s central bank hikes key rates to tame inflation

July 27th, 2010 - 1:31 pm ICT by IANS  

Mumbai, July 27 (IANS) India’s central bank Tuesday stepped up the attack in its battle against rising prices, hiking some key rates in a bid to suck excess money out of the system that fans inflationary expectations.
Reserve Bank of India (RBI) Governor D. Subbarao, conducting the first quarter review of the monetary policy for 2010-11, hiked the repurchase rate by 25 basis points to 5.75 percent and the reverse repurchase rates by 50 basis points to 4.50 percent.

This was the fourth such rate hike since the apex bank decided to tighten its monetary policy in January — first on Jan 29, followed by another on March 19 and again on July 2 — to rein in inflation that stands at 10.55 percent for June.

The other policy rates were kept untouched — such as the cash reserve ratio, or the minimum liquid money banks have to keep against deposits, and the statutory liquidity ratio, which is the money banks have keep in the form of cash, gold or securities.

“We will endeavour to achieve price stability and anchor inflationary expectations,” Subbarao said, spelling out the apex bank’s monetary policy stance for the remaining part of this fiscal before chief executives of commercial banks here.

“The stance of monetary policy is intended to contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures,” the central bank governor added.

Repurchase rate, often referred to as the short term lending rate, is the interest the apex bank charges on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds.

Reverse repo rate, referred to as the short term borrowing rate, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the central bank.

According to the central bank governor, the measures taken Tuesday will help to:

-Moderate inflation by reining in demand pressures and inflationary expectations

-Maintain financial conditions conducive to sustaining growth

-Generate liquidity conditions consistent with policy actions

-Reduce the volatility of short-term rates in a narrower corridor.

Yet, the bank raised its outlook on inflation to 6 percent by the end of March 2011 from 5.5 percent projected earlier, while the growth in the country’s gross domestic product for this fiscal is projected at 8.5 percent against 8 percent earlier.

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