The Reserve Bank of India (RBI) on Tuesday raised the repo rate, the rate at which it lends to banks, by 25 basis point (one basis point is one-hundredth of a percentage point) to 5.75 per cent. However, it increased the reverse repo rate at which it borrows from other banks by 50 bps to 4.50 per cent.
Industry experts feel the hike were in line with the expectation and the banking regulator might need to increase the rates further to rein in the inflation, which continues to be a worry for the government.
The bank rate and the cash reserve ratio (CRR) of scheduled banks have been retained at 6.0 per cent.
Inflation continues to be over 10 per cent for the last five months. Poor monsoon that lead to rise in food prices and the government’s decision to increase price of petroleum products further added to the inflation. RBI has raised the baseline projection for WPI inflation for March 2011 to 6.0 per cent from 5.5 per cent as indicated in the April policy statement.
RBI said that the policy rate changes would moderate inflation by reining in demand pressures and inflationary expectations, maintain financial conditions conducive to sustaining growth, generate liquidity conditions consistent with more effective transmission of policy actions and reduce the volatility of short-term rates in a narrower corridor.
Mahendra Jajoo, head of fixed income, Premarica Asset Managers, said they expect more rate hikes in the future as curbing inflation remains one of the focus area for the apex bank. As for 50 bps hike in reverse repo rate, Jajoo said, “When RBI was reducing rates, the cut in reverse repo rate was higher than the reduction in repo rate, thus increasing the gap between the two. Now it wants to narrow the gap between two and that’s why the hike in reverse repo was higher than that of repo rate.
Ritesh Jain, fixed income head, Canara Robeco Mutual Fund, said, "RBI has kept the CRR unchanged at 6 per cent and stressed upon the fact that liquidity situation plays a significant role. We believe that RBI would keep just enough liquidity in the market to support growth and normal functioning as excess liquidity would dilute the efficacy of policy rate action."
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