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RBI raised Repo Rate by 25 basis points to 6.75 per cent to Curb Inflation

RBI raised repo rate by 25 basis points to 6.75% & reverse repo by 25 basis points to 5.75%. It also revised upwards its inflation projection for March-end 2011.

Mar 18, 2011 12:00 IST
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The Reserve of India on 17 March 2011 increased the interest rate at which it injects liquidity into the banking system by 25 basis points to 6.75 per cent (repo rate). It also increased the interest rate at which it absorbs surplus liquidity from the banking system by 25 basis points to 5.75 per cent (reverse repo rate). The raise in repo and reverse repo rate was an initiative by RBI to tackle the rising inflationary trend. Rising global commodity prices, particularly oil compelled the Reserve Bank of India (RBI) to raise the interest rates again in its mid-quarter monetary policy review.


The central bank also revised upwards its inflation projection for March-end 2011 up to about 8 per cent from 7 per cent. The central bank warned that the investment climate could get vitiated, thereby posing a threat to the current growth trajectory.


This is the second time in the current fiscal that the RBI revised its inflation projection. It had in January 2011 upped the baseline projection for wholesale price index-based inflation for March 2011 to 7 per cent from 5.5 per cent.


RBI’s latest decision to revise rates takes into account the impact of high international crude oil prices on freely-priced petroleum products, the increase in administered coal prices and pick-up in non-manufactured product prices.


The RBI has raised key short-term rates for the seventh time in the current fiscal to rein in price rise. With the latest round of increase in short-term rates, the RBI raised the repo rate by 175 basis points and the reverse repo rate by 225 basis points in 2011.


Banks are unlikely to raise deposit rates in response to the hike in key short-term rates. Banks are expected to up their lending rates by about 25 basis points to protect their margins. Lending rates have not moved up as much as deposit rates in the last few months.


The RBI stated its intention to persist with the current anti-inflationary stance. Risks to inflation remain clearly on the upside as domestic fuel prices are yet to adjust fully to global prices and also due to the persistence of demand pressures emerging from non-food manufacturing.

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