The Reserve Bank of India Friday said on the basis of the current macroeconomic assessment, it has been decided to raise the policy repo rate under the liquidity adjustment facility by 25 basis points from 8% to 8.25% with immediate effect, Reserve Bank of India website reported.
It has also raised the reverse repo rates by 25 basis points to 7.25% and the marginal standing facility rate to 9.25% with immediate effect. The cash reserve ratio stood unchanged at 6%.
The RBI raised key lending rates for the 12th consecutive time in 18 months to 8.25%. Post the hike, many analysts expected the RBI to pause the rate hike cycle.
The annual inflation rose 9.78% for August, its highest in over a year, driven by rising prices of food and manufactured products.
Abheek Barua, chief economist at HDFC Bank said, “Given inflation is still very much on RBI’s priority, we don’t see a pause at this time.” He also stated, Älso if you see the indirect indicators like excise collections, you would find that growth has not dramatically collapsed, it has just moderated.” If the RBI’s governer’s past utterances are any indication, the hawkish stance on inflation will remain. “Not withstanding signs of moderation, inflationary pressures are clearly very strong, “he said during the first quarter monetary policy review on July 26.
The passenger car sales have dropped in recent months after increasing 30% in the fiscal year ended in March, suggesting rising borrowing costs are hurting consumer durables demand.
The rates increases could worsen growth in bank credit, car sales, factory output and non-oil imports which are already reeling under pressure.
The Reserve Bank has already raised the repo rate 11 times between March 25, 2010 and July 26, 2011. The increase in July was by 50 basis points or 8%. The cumulative increase in the repo rate over this period was 325 basis points.
The policy action in this review is expected to reinforce the impact of past policy actions to contain inflation and anchor inflationary expectations.
RBI is one of the most active central banks globally to manage inflation. Few other global banks like Bank of England, The European Central Bank and Swedish Central Bank among others continue to hold rates steady at reviews last week, amid easing inflationary pressures in the euro zone and concerns over weakening growth prospects.
Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010) of currency reserves. It plays an important role in development strategy of the government and is a member of the Asian Clearing Union.
