Indian central bank hikes interest rate to curb inflation

Indian central bank Reserve Bank of India (RBI) Thursday announced bold policy move to raise key short-term rates in an asymmetric way in a bid to narrow rate corridors and curb inflation.

The first inter-quarter policy review by RBI said, repo rate and reverse repo rate will be adjusted up by 25 basis points and 50 basis points, respectively.

Hence, repo rate at which commercial lenders borrow money from the central bank will reach 6 percent from 5.75 percent and reverse repo rate at which the central bank pay for money parked at its place will go up to 5 percent from 4.5 percent.

RBI said, inflation has entered a period of plateau and remains as the dominant concern in macroeconomic management.

Indian central bank aims to contain inflation without disrupting growth, and reduce volatility in overnight call money rate to intensify monetary transmission mechanism and normalize monetary policy.

The central bank also highlighted the slow deposit growth due to negative real interest rates while stressing the need to restore 5 percent to 5.5 percent of inflation levels.

The aggressive move surpassed market expectation of at most 25 basis points tightening of policy rates, with some arguing for a pause of monetary normalization from relaxed monetary policy in global financial meltdown.

Indranil Pan, chief economist with Kotak Mahindra Bank, Thursday told the media that inflation remain a concern for RBI and the central bank could raise key rates by another 25 basis point in November with growth side consolidating.

India major stock index Sensex responded to the monetary tightening positively by gaining around 200 points after one hour of the announcement from instant drop on the hike of interest rates.

So far this year, Indian central bank has raised repo and reverse repo rates by 125 basis points and 175 basis points in addition to 100 basis points of hike with cash reserve ratio.

RBI also expressed cautious optimism on global recovery and concluded that growth remains steady in India despite recent volatility in industrial production.

India reported 13.8 percent of industrial output growth in July from disappointing 7.1 percent in June and saw 8.5 percent of headline inflation in August easing from 9.8 percent in the previous month.

[Source: Xinhua, Mumbai, 16Sep10]

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