India’s central bank hikes short-term lending, borrowing rates

September 16th, 2010 - 1:53 pm ICT by IANS  

Mumbai, Sep 16 (IANS) India’s central bank Thursday hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points respectively, continuing with its tight monetary policy stance since January to tame inflation.
The repurchase rate now stands revised to 6 percent from the earlier 5.75 percent, while the reverse repurchase rate has been hiked to 5 percent from 4.5 percent in the first mid-quarter review of the monetary policy for this fiscal.

Conducting the review, Reserve Bank of India (RBI) Governor D. Subbarao said even though India’e economic growth remained stable, the recent volatility in industrial output remained a concern, along with inflationary expectations that still loomed large.

“Inflation rates have reached a plateau but are likely to remain at unacceptably high levels for some months. The prices of food articles, which rose by 14 percent in August are still contributing to the pressure,” Subbarao said.

“The headline inflation remains significantly above the trend of 5-to-5.5 percent in the 2000s. There is, therefore, need for continued policy response to contain inflation and anchor inflationary expectations,” he added.

The review came against the backdrop of India’s industrial growth growing 13.8 percent in July, as against 7.1 percent in the previous month, while the annual inflation rate declined to 8.51 percent in August from 9.78 percent in the previous month.

In the previous review, the central bank had stepped up its attack on rising prices and hiked two key short-term rates, while predicting an eventual increase in interest rates on loans and deposits, and also raising its forecast on inflation and growth.

This review has seen the fifth 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 and then on July 27 — to rein in inflation.

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 RBI Governor said the measures taken Thursday will contain inflation without disrupting growth, even as the ongoing process of normalisation of the monetary policy would continue.

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