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RBI raises key rates by 25 basis points to combat inflation

MUMBAI: The Reserve Bank of India on Friday raised its key short-term lending and borrowing rates by 25 basis points each as part of its tight money policy to combat inflation, which the government feels is a cause of concern.

The repo and reverse rates (short-term rates at which the RBI lends and borrows from banks) were hiked to 5 per cent and 3.5 per cent, respectively, and could make banks commercial lending dearer.

“These measures should anchor inflationary expectations and contain inflation going forward,” the RBI said a month ahead of the announcement of its annual monetary policy on April 20 for 2010-11.

Finance Minister Pranab Mukherjee had expressed concern saying inflation was heading to double digits from 9.89 per cent at present while at the same time not giving up on growth.

“As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected,'' the RBI said.

The decision to tighten monetary policy follows inflation surpassing the RBI's March-end projection of 8.5 per cent and the government's recent decision to hike prices of petrol and diesel.

WPI inflation

“Headline Wholesale Price Index (WPI) inflation on year-on-year basis at 9.9 per cent in February has exceeded our baseline projection of 8.5 per cent for end March 2010,'' the RBI said, justifying its decision to hike key rates ahead of its monetary policy.

Rising commodity and energy prices are exerting pressure on overall inflation, it said, adding that “the acceleration in the process of non-food manufactured goods and fuel items in recent months has been of particular concern.''

Excise duty

Besides raising the excise duty by 2 percentage points to 10 per cent, the government also increased duties on crude, petrol and diesel which saw the petrol and diesel prices going up by over Rs. 2.50 a litre. The central bank further said that even as food prices, which soared to around 20 per cent in December, had started moderating “they remain elevated.'' The food inflation for the week ending March 6 declined to 16.3 per cent.

The RBI has also expressed concern over food inflation spilling over to non-food manufactured goods.

“More importantly, the rate of increase in prices of non-food manufactured goods has accelerated quite sharply ... taken together, these factors heightened the risks of supply-side pressures translating into generalised inflationary process,'' it said.

The RBI also expressed the fear that rising industrial growth could add to further inflationary pressure in the coming days.

Lenders expect interest rates to rise, though moderately, following the RBI's move. However, many bankers said they would assess market conditions, before taking any such decision.

Several banks, including major players like ICICI Bank, HDFC Bank, and Bank of India, have already raised deposit rates which will increase the cost of funds and have implications for the lending rates.

PTI reports from New Delhi

To impact growth

Though not surprised over the policy rate hikes by the Reserve Bank, industry on Friday said the move was the beginning of tightening of interest rates which may impact growth. Given the tight-rope walk by the government and the central bank in the wake of near double-digit inflation, industry, however hopes that the modest hike in policy rates could be absorbed in a growing economy.

Assocham Secretary General D. S. Rawat said the impact would not be “substantial”. He, however, said inflation had become a serious cause of concern and needed to be addressed. .

“Therefore, these measures are expected. There will not be any substantial impact on the growth of the economy because it will be absorbed,” he said.

PHD Chamber of Commerce and Industry President Ashok Kajaria said “it appears the government has decided to control inflation in coordination with the RBI. But it would mean the beginning of an interest regime which will blunt the competitiveness of our industry.” — PTI

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