RBI hikes repo, reverse repo rates by 25 bps

MUMBAI: The Reserve Bank of India (RBI) resumed its rate hike cycle at its quarterly monetary policy review on Tuesday as soaring inflation stalks Asia's third-largest economy. RBI raised repo and reverse repo rates by 25 basis points each.

Repo rate , the one at which RBI lends to banks will now be 6.50%, reverse repo, the rate banks receive for depositing funds with the central bank will be at 5.50%. Cash reserve ratio, the proportion of deposits that banks have to keep aside, was left untouched at 6%.

RBI also raised March inflation forecast to 7% from 5.5%. The central bank maintained that India's GDP will grow at 8.5% for FY-2011.

Prime Minister Manmohan Singh's government is being blamed by Opposition for failing to save the majority from price increases, where wholesale price index (WPI) in December rose to 8.43% and October gains were raised to 9.12%. Food prices are advancing at more than 15%. Bajaj, Maruti Suzuki, Tata Steel , Hindalco have all increased prices due to soaring input costs.

Profit margins for companies such as battery-maker Exide Industries have shrunk.

Subbarao raised policy rates six times in 2010 by 25 basis points each, but that turned out to be too little. In contrast, his predecessor YV Reddy often shocked the markets. It has been the most aggressive major central bank in Asia this year.

Industrial output fell to an 18-month low in November with production growing at a slow 2.7 percent.

RBI on Monday said that containing inflation would be the top priority as high rate of price rise could hurt the economic growth. In its assessment of inflation, though the central bank has spoken at length on the supply-side constraints, it has after a long time acknowledged that high food and fuel inflation pose a risk of spillover to core inflation through higher input costs and inflation expectations.

The RBI, however, was optimistic about the economy's growth saying that the robust gross domestic product growth in the first half of the current fiscal suggested that the economy had returned to its earlier high growth path.

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Source: http://timesofindia.indiatimes.com/business/india-business/RBI-hikes-repo-reverse-repo-rates-by-25-bps/articleshow/7359243.cms

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