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RBI Raises Repo Rate By 25 Basis Points

25 October, 2011

The Reserve Bank of India (RBI) raised interest rates on Tuesday for the 13th time since early 2010 but gave a strong signal it may be finished with its current tightening cycle as growth slows and it expects high inflation to ease starting in December.

The RBI raised its policy lending rate, the repo rate, by 25 basis points to 8.5 per cent, in line with expectations in a Reuters poll last week.

It also revised down its growth forecast for the current fiscal year ending in March to 7.6 per cent from 8 per cent with a downward bias earlier, while sticking with its forecast that headline wholesale price index inflation will ease to 7 per cent at the end of the fiscal year.

The likelihood of a rate move at its December review is “relatively low,” the central bank said in a statement.

“Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted,” it said.

Investors took comfort in the prospect that India’s steady upward rise in interest rates may be at an end.

The benchmark 10-year bond yield fell as much as 7 basis points to 8.69 per cent after the policy statement, while the 5-year swap rate fell 10 bps to 8.30 per cent. The main BSE index extended gains to as much as 1.1 per cent before dropping.

“Clear direction from the RBI is now in place, that they are not looking at any more increase,” Indranil Pan, chief economist at Kotak Mahindra Bank.

The RBI under Governor Duvvuri Subbarao has been one of the most aggressive central banks anywhere and has continued to take its fight to inflation even as its global counterparts have refocused monetary policy towards promoting growth.

Subbarao maintained his hawkish view on Tuesday.

“While the impact of past monetary actions is still unfolding, it is necessary to persist with the anti-inflationary stance,” he said in the policy statement.

The central bank warned that medium term inflationary risks in Asia’s third-largest economy remain high due to structural imbalances in agriculture, infrastructure bottlenecks, and India’s fiscal deficit.

“In the absence of progress on these, over the medium term, the monetary policy stance will have to take into account the risks of inflation surging in response to even a moderate growth recovery,” it said.

Despite continued policy tightening, inflation in India remains sticky, with the headline wholesale price index up 9.72 per cent annually through September, its 10th straight month above 9 per cent and highest among the BRIC grouping of economies that includes Brazil, Russia and China.

Inflation in India is driven in large part by high food and global commodity prices as well as fiscal policies that spur demand, all of which is beyond the scope of monetary policy, prompting some critics to urge the RBI to relent in its tightening.

Meanwhile, India’s economy grew at 7.7 per cent in the June quarter, its weakest in six quarters, while industrial output growth was below 5 per cent in July and August.

In last week’s Reuters poll, 17 economists had expected the central bank to raise rates on Tuesday but 13 had expected it to pause, with most respondents expecting rates to remain unchanged after Tuesday for the remainder of the fiscal year through March.


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RBI Raises Repo Rate By 25 Basis Points

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