RBI hikes repo rate to 8.5 per cent; CRR to go up to 8.75 per cent in 2 stages
24 Jun 2008
Mumbai: The Reserve Bank of India (RBI) today raised its key lending rate and increased the cash reserves that banks should keep with it by 50 basis points each to tame inflation that hit a 13-year high early in June.
In the second increase this month in its repo rate, the RBI raised the key lending rate to 8.5 per cent from 8.0 per cent with immediate effect.
RBI will raise the cash reserve ratio to 8.75 per cent from 8.25 per cent in two stages – to 8.5 per cent from July 5 and to 8.75 per cent from July 19.
RBI said the measures are ''consistent with the stance of monetary policy and on the basis of incoming information on domestic and global macroeconomic and financial developments.''
''In view of the criticality of anchoring inflation expectations, a continuous heightened vigil over ensuing monetary and macroeconomic developments is warranted to enable swift responses with appropriate measures as necessary, consistent with the monetary policy stance,'' RBI said in a release.
''The escalation in inflation last week mainly reflects the pass-through of international crude prices to domestic prices effected on 5 June, 2008. Unlike in some mature economies, however, the pass-through is not occurring on a continuous basis in developing economies, including India. Thus, the policy response to the escalation in crude prices could be somewhat similar to other countries but tailored to suit our conditions'', it noted.
While there are some underlying inflationary pressures impacting inflation in India, besides the oil price spike, RBI said ''the urgency of this broader, albeit somewhat painful but timely contraction has to be viewed in the context of the new reality of high and volatile energy prices not necessarily being a temporary phenomenon any longer.''
The RBI has been acting pre-emptively from April 2008 onwards, keeping in view the lagged effects of such measures on the economy.
It raised the cash reserve ratio by 25 basis points each from the fortnights beginning 26 April, 10 May and 24 May, 2008.
Subsequent to the announcement of the oil price hike by the government, the repo rate was raised by 25 basis points on 11 June.
