RBI tightens monetary policy more than expected

RBI lifts key rates, CRR; signals more tightening

The RBI raised rates more forcefully than expected in the face of inflation that has held stubbornly above 10 per cent for the past five months.

The central bank raised repo rate by 25 bps, reverse repo rate by 50 bps, while the CRR was left unchanged.

Highlights of RBI's first quarter review of monetary policy

The short-term borrowing (reverse repo) rate was raised by 0.50 percentage point to 4.50 per cent, while the short-term lending (repo) rate was raised by 0.25 percentage points to 5.75 per cent.

As expected, the RBI left the cash reserve ratio (CRR) for banks at 6.00 percent, amid ongoing tight liquidity in the banking system.

This was the fourth such rate hike since the apex bank decided to tighten its monetary policy in January - first on January 29, followed by another on March 19 and again on July 2 - to rein in inflation that stands at 10.55 percent for June.

RBI asks banks to beef up deposit mobilisation

The other policy rates were left untouched - such as the CRR, or the minimum liquid money banks have to keep against deposits, and the statutory liquidity ratio, which is the money banks have keep in the form of cash, gold or securities.

"We will endeavour to achieve price stability and anchor inflationary expectations," Reserve Bank of India (RBI) Governor D Subbarao said, while spelling out the apex bank's monetary policy stance for the remaining part of this fiscal before chief executives of commercial banks.

"The stance of monetary policy is intended to contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures," the central bank governor added.

Repurchase rate (repo rate), often referred to as the short-term lending rate, is the interest the apex bank charges on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds.

Reverse repo rate, referred to as the short-term borrowing 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 central bank.

According to the central bank governor, the measures taken on Tuesday will help to:

-Moderate inflation by reining in demand pressures and inflationary expectations

-Maintain financial conditions conducive to sustaining growth

-Generate liquidity conditions consistent with policy actions

-Reduce the volatility of short-term rates in a narrower corridor.

Yet, the bank raised its outlook on inflation to 6 percent by the end of March 2011 from 5.5 percent projected earlier.

The government is counting on normal summer monsoon rains to results in better crop yields and ease pressure on food prices, and has already said inflation should decline to 6 percent by December, a figure private economists put closer to 8 percent.

The central bank also raised the economic growth forecast to 8.5 per cent for the 2010-11 fiscal from the earlier 8 per cent.