Reserve Bank hikes short term rates to tame inflation

Mumbai: The Reserve Bank of India (RBI) on Tuesday raised its short-term lending and borrowing rates by 0.25% and 0.50% respectively to bring inflation to 6% by March 2011 from double digits now, but the move would put pressure on banks' interest rates, reports PTI.

In its monetary review, the central bank, however, kept its cash reserve ratio (CRR), the cash which banks are required to keep with RBI, unchanged.

The RBI raised upwards the inflation target from 5.5% to 6% and said that economy will grow by 8.5%, up from earlier projection of 8%, this fiscal.

The increase in short-term lending rate (repo) to 5.75% and short-term borrowing rate (reverse repo) to 4.5% will be effective immediately.

Earlier this month, RBI had hiked repo and reverse repo rates by 0.25% as inflation remained above 10% for the fifth month in succession. Prior to this, RBI had raised thrice its key rates, since January.

"Inflationary pressures have exacerbated and become generalised with demand side pressures clearly visible, given the spread and persistence of inflation, demand-side inflationary pressures need to be contained," the RBI said.

Highlights of the RBI's first quarter review of the Monetary Policy 2010-11: 

* Repo rate raised by 25 basis points to 5.75%

* Reverse repo rate hiked by 50 basis points to 4.50%

* CRR and bank rate kept unchanged at 6%

* Hike in policy rates with immediate effect

* FY'11 growth seen at 8.5%, up from projection of 8% earlier

* Inflation pegged at 6% by FY'11 end, up from 5.5% earlier

* Demand-driven inflationary expectations at elevated level

* Expect to maintain financial conditions conducive to growth

* To start new mechanism of mid-quarter review

* First mid-quarter review on 16 September 2010

* Monsoon better than last year, good for agri production

* Capital inflows expected to be high on strong economic growth

* Second quarterly policy review on 2 November 2010

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