RBI hikes repo rate by 25 bps to 8 per cent

Mumbai: The Reserve Bank of India (RBI) today raised its key lending rate by 25 basis points to 8.00 per cent, tightening an already tight credit market, in a bid to rein in inflation which is already past 9.00 per cent.

The hike in repo rate, announced after market hours, was outside its scheduled policy review.

The RBI's next scheduled policy review is slated for 29 July.

The reverse repo rate, the rate at which the central bank absorbs cash from the market, was left unchanged at 6.00 per cent.

The cash reserve ratio (CRR) for banks – the extent to which banks have to keep cash with the RBI, the central bank's main policy instrument - was also left unchanged.

The repo rate is now at its highest since November 2002.

The RBI in its monetary policy for 2008-09, announced on 29 April, had stated, inter alia, that the overall stance will broadly be to ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum, the central bank pointed out in a release.

The RBI had also proposed to respond swiftly on a continuing basis to the evolving constellation of adverse international developments and to the domestic situation impinging on inflation expectations, financial stability and growth momentum, with both conventional and unconventional measures, as appropriate.

The year-on-year wholesale price-based inflation which was 4.36 per cent on 12 January 2008 (at the time of announcement of the third quarter review for 2007-08) increased to 7.33 per cent on 12 April (at the time of announcement of the annual policy statement for 2008-09) and to a high of 8.24 per cent on 24 May.

With a hike in fuel prices last week inflation is expected to have already pushed above 9 per cent.

Further, the consumer price index, which ranged from 4.8 to 5.9 per cent in January 2008 increased to a range of 7.8 to 8.9 per cent in April 2008.

"While monetary policy has to respond proactively to immediate concerns, it cannot afford to ignore considerations over a relatively longer term perspective of, say, one to two years, with respect to overall macroeconomic prospects. At the same time, it is critical at this juncture to demonstrate on a continuing basis a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations," the release added.
 
Accordingly, the Reserve Bank of India has decided to increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points to 8.00 per cent from 7.75 per cent with immediate effect, the release said.