The Reserve Bank of India decided on Tuesday to hike its key interest rates for the sixth time this year in a bid to cool inflation.
The widely-expected quarter point increase in rates is likely to trigger forex inflows into the nation. In the near-term, likelihood of rate hikes are relatively low, the central bank said.
The repo, the rate at which the RBI lends, was raised to 6.25%. The reverse repo, the rate at which the central bank borrows from banks, was lifted to 5.25% from 5%. The rate hikes will take immediate effect.
RBI's previous move was in September when it lifted the repo rate by a quarter point and the reverse repo by 50 basis points.
The central bank headed by Duvvuri Subbarao today retained the cash reserve ratio, which determines the amount of funds that banks are required to set aside with the central bank, at 6%.
"Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low," the central bank said in its second quarter monetary policy review statement.
India's inflation is stubbornly high. Annual inflation as measured by the wholesale price index rose to 8.62% in September from 8.51% in the previous month. The current rate of inflation is well above the comfort zone of RBI. Going forward, the risks to inflation are largely on the upside, the RBI said.
Food inflation has not shown the expected post-monsoon moderation, the central bank noted. But when the economy is expanding close to trend, RBI said the risks of structural food inflation spilling over into prices of other commodities are significant and that could potentially offset the recent moderation.
RBI said the baseline projection of wholesale price inflation for March 2011 has been placed at 5.5%, which was equivalent to 6% under the old series. The latest projection remains unchanged from that made in July.
Wholesale price inflation is likely to slow to around 6% by December, Montek Singh Ahluwalia deputy chairman of the Planning Commission told reporters today.
The central bank left the baseline real GDP growth projection for 2010-11 unchanged at 8.5%. Volatility in industrial production raises concerns about a deceleration, while other indicators of economic activity suggest continuing momentum, RBI noted.
Although the ultra loose monetary policy of advanced economies may benefit the global economy in the medium-term, it will trigger further capital inflows into emerging economies in short term, adding upward pressure on global commodity prices, the bank said.
Even though India requires capital flows to finance its widening current account deficit, large capital flows beyond the absorptive capacity of the economy could pose a major challenge for exchange rate as well as monetary management, it added.
Widening of the country's current account deficit raises concern, the RBI noted, given the uncertainty in international capital flows. The central bank also expressed concern over the sharp rise in asset prices in a short time.
The central bank forecasts money supply M3 to grow 17% in 2010-11. Recent lower growth in M3 growth reflected the moderation in growth in bank deposits, particularly long-term deposit.
The overnight cash rates had risen to its highest level in two years on October 29 after funds from banks were diverted to subscribe the shares of the government-owned Coal India Ltd. In order to ease liquidity conditions, RBI permitted commercial banks to avail funds up to 1% of their deposits. The central bank will hold additional money market auctions this week.
Finance Secretary Ashok Chawla said yesterday that liquidity easing steps of the central bank are not related to the monetary policy and inflation remains a major concern.
Regarding the global economic situation, the RBI said any slowdown in recovery is likely to have an adverse impact on growth in emerging market economies. Further, the central bank noted that the upward risk to inflation has increase for these economies. The Indian central bank also pointed out that further quantitative easing by advanced economies will pose additional risk to global commodity prices.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.