Hike is higher than was expected; market drops over 1% on the announcement
The Reserve Bank of India (RBI) today raised key rates by a steep 50 basis points. (bps). Following this, the repo rate has gone up to 8% from the earlier 7.5% and the reverse repo rate to 7% from 6.5%. The central bank, however, kept the cash reserve ratio (CRR) rate unchanged at 6%. This is the 11th time since March 2010 that the RBI has hiked interest rates in a bid to tame inflation.
Despite the economy showing signs of cooling down, Wholesale price inflation (WPI) in June rose to an annual 9.44% from 9.06% in May, driven by higher prices lf fuel and manufactured goods. Finance minister Pranab Mukherjee recently maintained that inflation would continue to remain high till December.
Stating that the monsoon, global commodity prices and the Eurozone crisis have the potential to alter growth path and inflation level, the RBI said, "A significant departure of monsoon from 'normal', a collapse of global commodity price bubble and Eurozone debt crisis assuming full-blown proportion" can alter both growth as well as inflation forecasts.
The central bank, however, retained its economic growth forecast for the current fiscal at around 8%. A report by RBI-sponsored professional forecasters, however, scaled down GDP growth to 7.9% from earlier projection of 8.2%.