India’s central bank hikes rates again to fix inflation (Lead)

November 2nd, 2010 - 2:00 pm ICT by IANS  

Mumbai, Nov 2 (IANS) With inflation rate still above its comfort zone, India’s central bank Tuesday hiked both its short-term borrowing and lending rates by 25 basis points each in what could trigger higher interest rates on auto, housing and corporate loans.

The repurchase rate stands revised to 6.25 percent from 6 percent, while the reverse repurchase rate has been hiked to 5.25 percent from 5 percent in the sixth such interest rate tweak this year.

Reserve Bank of India (RBI) Governor D. Subbarao, who conducted the bank’s second-quarter reviews of monetary policy for this fiscal, said the overall objective was to contain the annual inflation rate in the region of 4-4.5 percent, against 8.6 percent now.

“Although the headline inflation has moderated in recent months, the current rate of inflation is still well above the comfort zone of the Reserve Bank,” Subbarao said. The central bank, however, retained its growth forecast to 8.5 percent for this fiscal.

“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,” the governor added.

The other policy rates, such as bank rate, cash reserve ratio and the statutory liquidity ratio, were kept unaltered.

In the previous mid-quarter review Sep 16, the central bank had hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points, respectively, also in a bid to tight the monetary policy to tame inflation.

This review had seen the sixth such rate hike since the apex bank decided to tighten its monetary policy in January to tame inflation — first on Jan 29, followed by another on March 19, and again on July 2, then on July 27 and further on Sep 16.

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 repurchase 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.

The central bank governor said Tuesday’s measures will seek the following objectives:

- Sustain the anti-inflationary thrust of recent monetary actions and outcomes

- Rein in rising inflationary expectations due to the structural nature of food price increases

- Be moderate enough not to disrupt growth.

Spelling out the broader picture, the Reserve Bank governor said the Indian economy was on a strong footing and liquidity will be disrupted to ensure money flow to development projects, but inflation remained high due to both demand- and supply-side factors.

“The 8.8 per cent gross domestic product growth for quarter-one of 2010-11 suggests the economy is steadily regaining the pre-crisis growth trajectory,” Subbarao said.

“Although uncertainty persists with regard to global recovery, India’s domestic growth drivers are robust which should help absorb to a large extent the negative impact of slowdown in global recovery.”

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