RBI Raises Key Rates

The Reserve Bank of India raised policy rates for the eighth time in a year by the expected 25 basis points to tackle inflation that is running disproportionately higher with a potential to whittle down the government’s cherished 9% economic growth. Come April, borrowers will pay more per month on their home and car loans. Companies’ interest expenses will go up as banks raise their lending rate to pass on higher cost of deposits in the last two months. The central bank said economic expansion is at risk as soaring commodity and oil prices due to civil strife in North Africa and West Asia could affect investments even as it pursues anti-inflationary policy. It lifted inflation forecast by 1 percentage point to 8%, from 7% set in January as price rise is spilling over to manufactured products from food articles. Inflation in February was at 8.31%. Current account deficit is forecast to fall to 2.5%, from 3.5% of gross domestic product on rising exports. Repo rate, the rate at which the RBI lends to banks, has been raised 25 basis points to 6.75% which is still 1.55 percentage points lower than the inflation rate. Reverse repo, the rate it pays banks for deposits, has been raised by a similar proportion to 5.75%. A basis point is 0.01 percentage point. All other rates remain unchanged. The next monetary policy review is scheduled for May 3. Crude oil prices touched $120 a barrel recently due to supply disruptions in West Asia, the biggest exporting region in the world, as most authoritarian governments face revolt. Other commodities such as copper and rubber were at record highs as Western economies show signs of recovery. But last week’s earthquake in Japan has complicated forecast.

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