RBI raised repo rate and reverse repo rate by 25 bps each

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RBI raised repo rate and reverse repo rate
Looking at the inflation figures, Reserve Bank of India revised monetary policy and hiked repo and reverse repo rates by 25 basis points respectively in its mid-quarter policy review.

Repo, the rate at which it lends to banks, increased from 7.25% to 7.5% and reverse repo, the rate at which it borrows, was raised from 6.25% to 6.5%. Subsequently, the marginal standing facility (MSF) has also moved up by 25 basis point to 8.5%.

This is the tenth consecutive hike since March 2010.

Other policy rates, like Cash Reserve Ratio (CRR), the amount of the funds that bank have to keep with RBI, remained unchanged at 6%.

Announcing the policy RBI Governor, Duvvuri Subbarao said the domestic growth outlook remained unchanged and that inflation was way above the bank's comfort zone. "The challenge to contain inflation continues," he stated.

However, he was quick to add that there was no visible evidence of any sharp or broad-based slowdown. "Some short-term deceleration in growth remains unavoidable," he added.

“Inflation is matter of concern", he said.

The RBI said in its release, that corporate earnings growth and profit margins in the fourth quarter of 2010-11 were broadly in line with the performance over the past three quarters, suggesting that demand remained steady, and in the face of sharp increases in input costs, pricing power remained intact.

It even stated, “Credit grew steadily, while the composite Purchasing Managers' Index (PMI) for May 2011 suggests reasonably good conditions."

May inflation stood at 9.06%, much above the RBI's comfort zone of 5-6%. Non-food manufactured products inflation rose in May 2011 after showing some moderation in April 2011.

From monetary policy perspective, global commodity prices still remain the key external risk though some signs of moderation are becoming visible, as mentioned in mid-quarter monetary policy review in June 2011.

The bank further said, it would continue with its anti-inflationary stance to curb price rise. But this may have an adverse impact on the domestic growth trajectory.

OneIndia Money

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