RBI hikes Repo & Reverse Repo rate to curb inflation

Business

oi-Monika Nihalani

By Monika Nihalani

Published: Tuesday, July 26, 2011, 11:35 [IST]

To curb sticky inflation, Reserve Bank of India (RBI) today hiked repo rate and reverse repo rate in its monetary policy review. This is the 11th consecutive hike since March 2010.

Repo, the rate at which it lends to banks, increased from 7.5% to 8% and reverse repo, the rate at which it borrows from banks, hiked from 6.5% to 7%.

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

A hike in repo rates will increases the lending cost of banks, which in turn will be passed on to consumers. Hence, all loans are likely to become costlier and home loan EMIs will increase once banks hike their base rate.

Announcing the policy RBI Governor, Duvvuri Subbarao said, “Demand pressures have remained strong and moderation in demand is necessary to curtail inflation."

Though food inflation came down to an over two-year low for the week ended July 9, overall inflation is still hovering close to double digits due to high fuel prices.

From monetary policy perspective, global commodity prices still remain the key external risk though some signs of moderation are becoming visible. He further said on this, “Inflation to be determined by crude oil prices going forward."

He was also quick to add that, “Controlling inflation is imperative to sustain growth and we will continue with the anti-inflationary stance."

This may have an adverse impact on the domestic growth trajectory.

OneIndia Money