India’s central bank hikes rates sharply to tame inflation


Mumbai : India’s central bank Tuesday sharply hiked key rates by 50 basis points in the 11th such exercise since January 2010 to tame inflation, setting the stage for commercial banks to raise their interest charged on personal and corporate loans.

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The repurchase rate, the interest the central bank levies on short-term borrowing by commercial banks, has been hiked to 8 percent from 7.5 percent and reverse repurchase rate, or interest paid on short-term lending, raised to 7 percent from 6.5 percent.

The rate hikes were effected by Reserve Bank of India (RBI) Governor D. Subbarao during the first quarterly review of the apex bank’s monetary policy for this fiscal conducted at his headquarters in Mint Road here.

While the rate hike was expected, the quantum of increase shocked the markets, which saw the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) dip to 18,588.64 points, to log a loss of 282.65 points, or 1.5 percent over the previous close.

The situation was no different at the National Stock Exchange, where the broader S&P CNX Nifty was ruling at 5,591.25 points, with a fall of 89.05 points, or 1.57 percent. All sector-specific indices at the two bourses were also down.

“Notwithstanding signs of moderation, inflationary pressures are clearly very strong,” Subbarao said, addressing the chief executives of commercial banks after the policy update.

“Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for wholesale inflation for March 2012 is revised upward from 6 percent with an upside bias.”

The new projection on inflation is 100 basis points above, at 7 percent by year-end.

On growth, the Reserve Bank governor said amid a slowdown in the factory output growth, the robust export performance should augur well, but the performance of monsoon so far could exert pressures on the yields of coarse grains, pulses, oilseeds and cotton.

“Against this backdrop, the baseline projection of real gross domestic product growth is retained at 8 percent, as set out in the May 3 policy statement,” said Subbarao, adding that the stance of the central bank will be to tame inflation and maintain growth.

In the policy update, the reserve ratios — which call for the quantum of money against deposits banks have to keep as liquid assets — stood unchanged at 6 percent in the case of cash reserve ratio and 24 percent in the case of statutory liquidity ratio.