The Hindu : Front Page : RBI signal on lending rates

Online edition of India's National Newspaper
Wednesday, Oct 26, 2005

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Front Page

RBI signal on lending rates

Special Correspondent

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MUMBAI: The Reserve Bank of India on Tuesday raised the interest rate at which the central bank borrows from commercial banks (called the reverse repo rate) by one-fourth of one per cent (or 25 basis points), indicating a short-term rise in interest rates.

With effect from October 26, the rate will be 5.25 per cent, up from five per cent.

However, another indicator of interest rate rise or the key signalling instrument, the Bank Rate (at which the central bank lends to commercial banks), remains unchanged at six per cent.

"Given the outlook for inflation in the context of the oil economy in India, it may be difficult to contain inflation in the range of 5-5.5 per cent projected earlier, without an appropriate policy response," said Y. V. Reddy, RBI Governor, while announcing the Mid-Term Review of Annual Policy of 2005-06.

Describing oil price as the single largest risk to the global economy, he warned that "a large permanent component" of the price increase in the global market needed to be passed on to the Indian consumer in the medium-term.

Based on the current assessment of a pick-up in agricultural output and in the momentum in other sectors, the RBI has revised the GDP growth projection for 2005-06 to 7-7.5 per cent from the earlier estimate of around seven per cent.

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