In a bid to rein in runaway inflation, expected to top 9% soon, the Reserve Bank of India (RBI) on Wednesday increased the repo rate?the rate banks pay the central bank to borrow short-term funds?by 25 basis points to 8.00% from 7.75 % with immediate effect. This follows the recent hike in fuel prices, which is expected intensify long-term inflationary pressure.
However, there is no change in the reverse repo rate, or the rate RBI pays banks when they park funds with it. Over the past two months, the apex bank has hiked the cash reserve ratio by 75 basis points in three tranches. Bankers, who are now gearing up to hike their own interest rates, expect a much tighter monetary policy regime in the days ahead.
?In the light of both domestic as well as international situations and reviewing the current macroeconomic and overall monetary conditions, and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis,? RBI said in a statement on Wednesday evening.
That the hike comes just a day before the release of the monthly index of industrial production figures for April 2008 signals the bank?s confidence that the pace of industrial growth has picked up.
RBI further said it had indicated in its annual monetary policy statement that it would respond swiftly to adverse international and domestic developments impinging on inflationary expectations, financial stability and the growth momentum, with both conventional and unconventional measures, as appropriate.
WPI-based inflation, which was 4.36% for the week ended January 12, 2008, increased to 7.33% on April 12 and to a high of 8.24% on May 24. ?We expect headline inflation at 8.8-9.5% until November 2008,?? said Abheek Barua, chief economist, HDFC Bank.