RBI ups rates again...But hints at a pause

The Reserve Bank of India (RBI) hiked the repurchase rate (repo rate) and the reverse repurchase rate (reverse repo rate) by 25 basis points (bps) each as part of its efforts to rein in spiraling inflation in a fast-growing Indian economy. The repo rate now stands at 6.25% while the reverse repo rate has increased to 5.25%. The bank rate and the cash reserve ratio (CRR) have been left unchanged at 6% each. The RBI left the FY11 GDP growth forecast unchanged at 8.5% while inflation target (based on new WPI series) for the current year has also been kept unchanged at 5.5%. Inflation target as per the old WPI series has been left untouched at 6%.



A section of economists, analysts and bond dealers were hoping for a status quo on monetary policy. The RBI started its rate tightening cycle in March this year. Between March and September of this year, the RBI has raised its repo rate, or the rate at which it lends to banks, by 125 bps to 6% in phases. The central bank has also raised its reverse repo rate, or the rate at which it absorbs excess liquidity from the system, by 175 bps to 5%, besides hiking the CRR, or the portion of deposits that banks need to keep with the RBI, by 100 bps to 6%.

The RBI said that the policy actions are expected to:

* Sustain the anti-inflationary thrust of recent monetary actions and outcomes in the face of persistent inflation risks.
* Rein in rising inflationary expectations, which may be aggravated by the structural nature of food price increases.
* Be moderate enough not to disrupt growth.

The RBI also said that it will continue to closely monitor both global and domestic macroeconomic conditions. "We will take action as warranted with a view to mitigating any potentially disruptive effects of lumpy and volatile capital flows and sharp movements in domestic liquidity conditions, consistent with the broad objectives of price and output stability," the RBI said.

Based purely on current growth and inflation trends, the RBI said it believes that the likelihood of further rate actions in the immediate future is relatively low. "However, in an uncertain world, we need to be prepared to respond appropriately to shocks that may emanate from either the global or domestic environment," it added.