RBI raises repo and reverse repo rates by 25 bps in Q2 monetary policy review

A day before Diwali, the Reserve Bank of India (RBI) has increased its short term lending and borrowing rates for the 13th time since March 2010. The RBI raised repo and reverse repo rates by 25 basis points to 8.5% and 7.5% respectively with immediate effect.

However, this hike of 25 basis points by the RBI was expected by the economist and bankers, on the back of the hovering high inflation, which is hovering close to two digit mark for quite some time. For the month of September it stood at 9.72% against 9.78% in August. On the other hand, India’s weekly food inflation also entered the two digit mark for the week ended October 8; it surged to 10.6% compare to 9.32% in the last week.

The apex bank has also decontrolled the saving banks deposit rates. Whilst announcing the second quarter monetary policy, Dr. D. Subbarao RBI governor, said 'Banks are now free to determine their savings bank deposit interest rate, subject to certain conditions.'

RBI expects headline inflation to moderate from first half of the fiscal year 2013. On October 24, the RBI said that the inflationary pressures are strong and persistent due to structural rigidities, continuing strong demand and the adaptive nature of inflation expectations. The path of inflation is sticky and remains broadly in line with earlier projections. With falling global commodity prices partly offset by rupee depreciation, the risks to inflation projections are now balanced.

The central bank has also reduced India’s economic growth forecast for the 2011-12. The RBI expects economy to grow by 7.6% in the current fiscal year from its earlier forecast of 8%. In the first quarter of the 2011-12, Indian economy grew by 7.7% compared to 8.8% in April-June 2010.