RBI hikes repo & reverse repo rates by 25 bps due to inflationary pressures
March 19, 2010:
In the Third Quarter Review of Monetary Policy in January 2010, the Reserve Bank had raised the CRR by 75 basis points in two stages. This reflected the growing confidence in the economy and the risk of supply side inflation spilling over into a wider inflationary process.
Since the Third Quarter Review in January 2010, while the recovery in growth has proceeded broadly along expected lines, the inflationary pressures have intensified beyond RBI's baseline projection. Even as food prices are showing signs of moderation, they remain elevated. More importantly, the rate of increase in the prices of non-food manufactured goods has accelerated quite sharply. Furthermore, increasing capacity utilisation and rising commodity and energy prices are exerting pressure on overall inflation. Taken together, these factors heighten the risks of supply-side pressures translating into a generalised inflationary process.
The Third Quarter Review had mentioned that our instruments of monetary policy are all currently at levels that are more consistent with a crisis situation than with a fast recovering economy. In the emergent scenario, low policy rates can complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in the prices of non-food manufactured goods.
The Third Quarter Review had also indicated that the Reserve Bank would take further action as warranted. Our assessment is that at the this juncture further policy action is warranted. Given the lags in monetary policy, it is better to respond in a timely manner, even if it is outside the scheduled policy reviews, than take stronger measures at a later stage when inflationary expectations have accentuated. Therefore, as a part of the calibrated exit strategy, initiated in the Second Quarter Review in October 2009 and carried forward in the Third Quarter Review in January 2010, RBI has decided :
to raise the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 4.75 per cent to 5.0 per cent with immediate effect.
to raise the reverse repo rate under the LAF by 25 basis points from 3.25 per cent to 3.5 per cent with immediate effect.
These measures should anchor inflationary expectations and contain inflation going forward. As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected.
The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, and take further action as warranted.
Rationale behind repo rate hike-Click here
Bank rates are expected to go up after March 2010-Click here
Domestic Bank Lending Rates-Click here
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