RBI hikes Rates

The Reserve Bank of India (RBI) in its quarterly review of the credit policy on Tuesday gave a clear indication that its monetary stance is aimed at containing inflation.The central bank, it seems, is willing to sacrifice growth for slaying the dragon of inflation.Inflation has remained in the double-digit arena for past six weeks, adding to the woes of the ruling coalition as it enters its last year in office.
RBI raised Repo rate by 50 basis points (bps) from 8.5 per cent to 9 per cent with immediate effect, increased the cash reserve ratio (CRR) by 25 bps to 9 per cent from the existing 8.75 per cent, with effect from the fortnight beginning August 30.The Repo rate is the rate at which banks are allowed to access funds from the RBI for liquidity adjustment. These measures are expected to suck up an estimated Rs 8,000 crore from the banking system.
Releasing the first quarter review of annual statement on the monetary policy for 2008-09, the central bank also revised its GDP growth projection for 2008-09 from the range of 8.0-8.5 per cent to around 8 per cent, barring domestic or external shocks.However, the apex bank kept bank rate and reverse Repo rate unchanged at 6 per cent. While the policy action would aim to bring down the current intolerable level of inflation to a tolerable level of below 5 per cent as soon as possible and around 3 per cent over the medium-term, RBI said, “At this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11-12 per cent to a level close to 7 per cent by March 31, 2009.’’ Referring to the emergence of any adverse and unexpected developments in various sectors of the economy, the central bank said it will continue to ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.The finance ministry commended the Reserve Bank of India’s stance on credit policy and hoped that the steps taken by it will bring down the price to a moderate level.It noted that on Monday in its first quarter review, the Reserve Bank of India had stated that potential inflationary pressure from international food and energy prices are likely to remain so for some time.
“Consistent with this conclusion, RBI has today increased the Repo rate by 50 bps and, with effect from August 30, 2008, the CRR by 25 bps. Government expects that the measures taken by RBI, in continuation of the measures already taken over the last two months, will help in moderating and containing inflation,” an official statement said.