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RBI Hikes Repo, Reverse Repo Rate by 0.25%

Stubborn inflation forces the Central Bank to effect rate hike for the sixth time this year

The Reserve Bank of India (RBI) on Tuesday raised the lending and borrowing rate by 0.25 per cent, or 25 basis points (bps). This is the sixth time this year the central bank has raised the policy rates to curb spiraling inflation.

The RBI raised the repo rate at which it lends to banks to 6.25 per cent and the reverse repo rate at which it absorbs excess cash to 5.25 per cent. The bank rate and the cash reserve ratio (CRR) have been retained at 6 per cent.

Expressing its concern over inflation, RBI said, “Both demand side and supply side factors are at play. Inflationary expectations also remain at an elevated level. Given the spread and persistence of inflation, demand side inflationary pressures need to be contained and inflationary expectations anchored.”

The central bank said that the stance of its monetary policy was intended to contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures and maintain an interest rate regime consistent with price, output and financial stability.

Wholesale inflation rose to 8.62 per cent in September on higher food prices from 8.5 per cent in August. It was in double digits for six straight months through July.

However, RBI was cautious in its approach so as not to ‘disrupt the growth’ of the economy. It said that through the policy moves it intended to ‘actively manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows.’