RBI hikes repo rate by 25 bps...Hints at a pause

on Tuesday raised its key lending rate by another quarter percentage point as it continues its fight against stubborn inflation while equally being concerned about slowdown in the Indian economy. The central bank today hiked the repurchase rate, or repo rate (at which it lends to banks) by 25 basis points (bps) to 8.50%. The reverse repo rate (at which the RBI absorbs money from banks) will now stand at 7.50%. The Marginal Standing Facility Rate will now be at 9.50%. The Bank Rate has been retained at 6%t. The Cash Reserve Ratio (CRR) of scheduled banks has been left unchanged at 6% of their net demand and time liabilities (NDTL). The policy actions and the guidance that is given are expected to continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation, the RBI said in a statement.



They will also reinforce the emerging trajectory of inflation, which is expected to begin to decline in December 2011, it said. The policy action will also contribute to stimulating investment activity, the central bank said. The projected inflation trajectory indicates that it will begin falling in December 2011, and then continue down a steady path to 7% by March 2012, the RBI said. Inflation is expected to moderate further in the first half of FY13, the RBI said. This reflects a combination of commodity price movements and the cumulative impact of monetary tightening, it said. "Further, moderating inflation rates are likely to impact expectations favourably. These expected outcomes provide some room for monetary policy to address growth risks in the short run," the central bank said. With this in mind, notwithstanding current rates of inflation persisting till November, the likelihood of a rate action in the December mid-quarter review is relatively low, the RBI said.

Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted, the RBI said. However, as always, actions will depend on evolving macroeconomic conditions, it added. It must be emphasised, however, that several factors - structural imbalances in agriculture, infrastructure capacity bottlenecks, distorted administered prices of several key commodities and the pace of fiscal consolidation - combine to keep medium-term inflation risks in the economy high, the RBI said. These risks can only be mitigated by concerted policy actions on several fronts, the central bank said. In the absence of progress on these, over the medium term, the monetary policy stance will have to take into account the risks of inflation surging in response to even a moderate growth recovery, it said.