RBI hiked Repo Rate by 50 basis points from 7.5 per cent to 8 per cent to tame Inflation

The Reserve Bank of India (RBI) in a bid to tame inflationary pressure hiked the short-term indicative policy rate (repo rate) by 50 basis points from 7.5 per cent to 8 per cent on 26 July 2011. The RBI Governor D. Subbarao also announced the first quarter review of Monetary Policy for 2011-12.

The first quarter review of Monetary Policy for 2011-12 revealed that headline wholesale price index (WPI) inflation rate for the first quarter of 2011-12 remained stubbornly close to double digits and inflationary pressures continued to be broad-based.

The decision to raise the rate by 50 basis points, beating the market expectation of 25 basis points was taken to drive home the fact that in the absence of complementary policy responses on demand and supply sides, stronger monetary policy actions are required.

With the hike in repo rate (the rate at which banks borrow from the central bank) the reverse repo rate (the rate at which banks park their funds with the RBI), with a spread of 100 basis points below the repo rate settled at 7 per cent. Similarly, the Marginal Standing Facility (MSF) rate, with a spread of 100 basis points above the repo rate, stood recalibrated at 9 per cent.

The hike by the central bank in rates is expected to put further pressure on consumers as lending rates of banks will be higher in the coming days.

The RBI also revised the WPI inflation projection for March 2012 from 6 per cent to 7 per cent. However, the central bank retained the projection of real GDP growth for the current year at 8 per cent. RBI pointed out that crude oil prices that remained volatile were a major risk factor.

The RBI opined that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate. The fiscal consolidation is likely to contribute to a sustainable growth path by rebalancing demand away from government consumption and towards investment.

The RBI also stated that the economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand.