RBI hikes key rates by 0.25 per cent

Hoping to put the brakes on soaring inflation, the Reserve Bank of India today hiked its key interest rates (repo and reverse repo) by expected 0.25 percentage point each. This was what most analysts had anticipated, although a few had predicted a higher rate hike.

The central bank raised its repurchase rate, or overnight lending rate, to 6.50 per cent and the reverse repurchase rate, or borrowing rate, to 5.50 per cent with immediate effect. It kept the cash reserve ratio - the percentage of deposits that lenders must park with RBI in cash - unchanged at 6 per cent, and banks' statutory liquidity ratio at 24 per cent.

"It is important to emphasise that the role of monetary policy in the current inflationary situation is confined to containment and prevention of food and energy prices from spilling over into generalized inflation and anchoring inflation expectations," RBI said in its monetary policy review for the financial third quarter that ended 31 December.

The RBI also extended some liquidity-easing measures to help banks tide over a persistent cash crunch. Banks can now borrow an additional 1 per cent against deposits until 8 April, as against 28 January previously.

The RBI has also extended its daily twin cash injection window for the same period.

Since the RBI has increased the repo rate, the cost of funds for banks will go up. The banks are likely to pass on the increased rates to borrowers.