Friday, September 16, 2011

RBI raises repo, reverse repo rates by 25 bps; CRR unchanged

NEW DELHI: The Reserve Bank of India (RBI) raised repo rates by 25 bps on Friday to 8.25% and reverse repo rates by 25 bps to 7.25%, to arrest rising inflation in Asia's third largest economy. CRR was unchanged at 6%.

The RBI raised key lending rates for the 12th consecutive time in 18 months to 8.25 per cent. Post the hike, most analysts expect the RBI to pause the rate hike cycle.

Annual inflation surged 9.78 per cent for the month of August, its highest in over a year, driven by rising prices of food and manufactured products.

The latest inflation numbers echoed the need for continued tightening, although the global scenarios remain weak and signal slowdown in the global economy.

"Given inflation is still very much on RBI's priority, we don't see a pause at this time," said Abheek Barua, chief economist at HDFC Bank. "Also, 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 governor's past utterances are any indication, the hawkish stance on inflation will remain.

"Notwithstanding signs of moderation, inflationary pressures are clearly very strong," he had said during the first quarter monetary policy review on July 26. "The current balance of global and domestic factors suggests that monetary policy needs to persist with a firm anti-inflationary stance."

Passenger car sales have slowed in recent months after jumping 30 per cent in the fiscal year ended in March, suggesting high inflation and rising borrowing costs are hurting consumer durables demand. Further, rate increases could worsen growth in factory output, bank credit, car sales, and non-oil imports which are already reeling under pressure.

The RBI has been one of the most active central banks globally to manage inflation.

The European Central Bank, Bank of England, 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.

A number of Asian central banks, including Malaysia's and South Korea's, paused their fight against inflation, while Brazil recently cut interest rates.
Source : ET

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