labels: rbi, economy - general, banks & institutions
No surprises as RBI hikes rates by 25 basis pointsnews
Rex Mathew
25 July 2006

RBI chief Y V Reddy has decided not to pull off any surprises this time around and has announced a 25 basis points hike in key interest rates, which is in line with market expectations. Strong economic growth, higher inflation and rising oil prices had made a rate hike a near certainty, though a section of the markets were hoping for status quo following mild statements on inflation by the RBI yesterday.

The reverse repo rate - the rate at which RBI borrows money - has been raised by 25 basis points to 6 per cent per annum while the repo rate - the rate at which the RBI lends money - has been raised by a matching 25 basis points to 7 per cent.

Bank rate - more of a reference rate used by banks to benchmark their lending rates - has once again been left unchanged at 6 per cent. Bank rate is considered as the signaling rate of the RBI on its longer term-interest rate outlook.

The cash reserve ratio (CRR) for commercial banks has also been left unchanged at 5 per cent.

GDP growth forecast for the current financial year has been retained at 7.5 to 8 per cent. Inflation target range for the current year has also been left unchanged at 5 to 5.5 per cent.

"Developments during the first quarter of 2006-07 indicate that money supply, deposit and credit growth are running well above the indicative projections, warranting caution by all concerned in this regard", the RBI said in the statement issued today.

"Taking into account the real, monetary and global factors, containing the year-on-year inflation rate for 2006-07 in the range of 5.0-5.5 per cent warrants appropriate priority in policy responses", the RBI said in support of the rate hike.

Stock market indices have come off their morning higher after the policy announcement, but the large cap indices are trading more than a per cent each higher. Banking stocks continue to do well and are sustaining the uptrend started yesterday.

Bond yields have gone up after the rate hike and the Rupee has declined modestly by around 0.1 per cent against the US Dollar.

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No surprises as RBI hikes rates by 25 basis points