RBI raises Repo Rate and Reverse Repo rate by 25bps

The Reserve Bank of India (RBI) raised the Repo Rate and the Reverse Repo rate by 25 basis points each to 5.25% and 3.75%, respectively. The Cash Reserve Ratio (CRR) has been hiked by 25bps to 6% from 5.75%; it will be effective from April 24. The CRR hike will absorb Rs125bn from the banking system. The Bank Rate remains unchanged at 6%.

The central bank expects the Indian economy to grow by 8% with upward bias in the fiscal year ending March 2011. Inflation is forecast to touch 5.5% by the end of March next year. Bank credit is expected to expand by 20% in FY11. It may be recalled that the RBI surprised the markets on March 19, 2010 by raising the repo rate and the reverse repo rate by 25 basis points each to 5% and 3.5%, respectively.

According to the RBI, the expected outcomes of the actions are:

(i) Inflation will be contained and inflationary expectations will be anchored.
(ii) The recovery process will be sustained.
(iii) Government borrowing requirements and the private credit demand will be met.
(iv) Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.