RBI hikes key rates by 0.25 percent to curb inflation

Tuesday, January 25, 2011

MUMBAI - The Reserve Bank of India (RBI) on Tuesday raised the repo rate and the reverse repo rate by 0.25 per cent, each, with immediate effect, in order to curb inflation.

Announcing its third quarterly monetary policy review here, the RBI said that it has increased its repo rate to 6.5 per cent from 6.25 per cent, while reverse repo rate has been increased to 5.5 per cent from 5.25 per cent.

The repo rate is the rate at which RBI lends, short-term, to commercial banks, while the reverse repo rate is the rate at which it borrows, short-term, from commercial banks.

This will make funds expensive for banks, and may lead to a hike in banks’ interest rates. The RBI also extended the additional liquidity support facility to banks till April 8.

The apex bank has, however, retained the Cash Reserve Ratio (CRR)– a portion of deposits that banks are required to maintain in cash with the RBI-at six per cent to ensure that the system had enough liquidity to meet the loan requirements.

The Reserve Bank projected GDP growth at 8.5 per cent for 2010-11. It also warned that inflation is a matter of concern, and revised its projection for the current fiscal to seven per cent, from 5.5 per cent forecast earlier.

The apex bank said its monetary action was aimed at controlling the rising inflationary expectations, while at the same time being moderate enough not to disrupt growth.

The RBI further said it aims to contain the overflow from rising food and fuel prices to generalized inflation, and continue to provide comfort to banks liquidity management operations. (ANI)

Filed under: Business

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