Bank rates hiked to rein inflation, says RBI governor


Bangalore: The bank rates were raised March 19 by 25 basis points to contain the wholesale price index (WPI) inflation rate, which shot up to 9.9 percent in February, Reserve Bank of India (RBI) governor D. Subba Rao said late Monday.

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“Given the inflation pressures and given the growth is consolidating, some normalisation was required. Both the repo rate and reverse repo rates were increased by 25 basis points to contain the inflationary pressures,” Rao told reporters here.

The RBI revised the repo rate to 5 percent from 4.75 percent and the reverse repo rate to 3.5 percent from 3.25 percent.

Repo rate is the interest the RBI charges on borrowings by commercial banks. A hike in this rate makes cost of borrowing costlier for banks.

Reverse repo rate is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the RBI.

“Inflation pressure is stronger than we anticipated. Between November 2009 and February 2010, in a space of four months, the WPI (wholesale price index) inflation has gone from 5.6 percent to 9.9 percent,” Rao recalled.

The RBI earlier projected that the WPI inflation rate would be 8.5 percent by March, 2010.

Clarifying that the hike in policy rates was not anti-growth, Rao said the country had to sacrifice a little bit of growth in the near-term in order to consolidate the medium-term growth.

“Because if we do not tighten now and take action ahead of time, the adjustment that we will have to make later on will be stronger and we might indeed have a hard landing,” Rao asserted.

Even if there was a short trade-off between growth and inflation, Rao maintained that it was important that inflation was kept low and that growth was sustainable.