September 16th, 2011
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RBI increases key interest rates

RBI Mumbai: The Reserve Bank of India, while announcing its mid-term review of the monetary policy, raised key interest rates by 25 basis points, in an attempt to contain high inflation. Following the increase, the short-term lending (repo) rate now stands at 8.25 per cent and the short-term borrowing rate (reverse repo) is at 7.25 per cent. The RBI has kept all other rates and ratios unchanged.

This is the 12th such hike since March 2010, making auto, home and other loans more expensive. “The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank’s comfort zone,” the central bank said. The RBI said the monetary stance will be “influenced by signs of downward movement in the inflation trajectory…”

Despite the RBI increasing key rates several times since March 2010, inflation shot up from 9.2 per cent in July to 9.8 per cent in August this year. The explanation given by the RBI is that the monetary policy operates with a lag, the cumulative impact of policy actions would thus be increasingly felt now in the form of a further moderation in demand and reversal of the inflation trajectory towards the latter part of the 2011-12 financial year.

GDP growth during the first quarter (April-June) of the 2011-12 financial year moderated to an 18-month low of 7.7 per cent from 8.8 per cent in the corresponding period year ago, following a slowdown in industrial output growth during July to 3.3 per cent, the lowest in 21 months. The RBI said food inflation is near double digits, despite the normal monsoon, underlining the fact that it is driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon.

After a slight moderation in July, non-food manufactured products inflation rose again in August, suggesting continuing demand pressures, it said. On September 3, food inflation stood at 9.47 per cent.

The monsoon has been normal so far, it said, adding that the first advance estimates for the 2011-12 kharif season hint at record production of rice, oilseeds and cotton, though output of pulses may decline.

Meanwhile, it said the hike in petrol prices by Rs 3.14 per litre with effect from September 16, 2011, will have a direct impact of 7 basis points on WPI inflation, in addition to an indirect impact with a lag.

Monetary transmission strengthened further with 45 scheduled commercial banks raising their base rates by 25-100 basis points after the RBI’s last review in July. Consequently, the base rate of various banks averaged 10.75 per cent in August, up from 10.25 per cent in July.


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