17/03 Indian central bank raises key interest rates by 25 basic points

English.news.cn 2011-03-17 14:52:00

MUMBAI, March 17 (Xinhua) — Indian central bank Reserve Bank of India (RBI) announced on Thursday that it will hike key interest rates by 25 basis points (bps) to contain inflation.

Indian repo rate for RBI to inject liquidity to the system and reverse repo rate for RBI to drain liquidity from the market are lifted to 6.75 percent from 6.45 percent and 5.75 percent from 5.5 percent, respectively.

The monetary tightening move falls in line with market expectations but will bring some pressure to the banking system.

Meanwhile, RBI revised its inflation forecast by the end of March upwardly to around 8 percent from previous projection of 7 percent, due to higher international crude oil prices and domestic liberalization of petroleum pricing.

The central bank also warned that the continuing uncertainty on energy and commodity prices may vitiate Indian investment climate, posing a threat to current growth trajectory.

Though it’s early to assess macroeconomics impacts of natural disaster in Japan, substitution of thermal for nuclear energy in Japan may exert further pressure on petroleum prices, said the monetary policy review issued by RBI.

India government shall focus on the quality of expenditure and keep the aggregate under control without compromising on the delivery of services, said RBI.

The monetary review added that, only by doing this can the fiscal situation contribute to demand-side inflation management, highlighting the possible increase of subsidies on petroleum and fertilizers due to high oil prices.

Indian current account deficit for fiscal year 2010-2011 ending March 31, 2011 is estimated at around 2.5 percent, providing some comfort to the decision makers, said RBI.

Still, it’s necessary to focus on the quality of capital inflows with greater emphasis on attracting long-term components including foreign direct investment to sustain the balance of payment in the medium term.

Going forward, overall liquidity situation is expected to move close to the comfort level of RBI despite of likely temporary pressures in the second half of March, according to the report.

Indian central bank has raised key interest rates eight times since March 2010 to curb persistent inflation with repo and reverse repo rate lifting by 2 percent and 2.5 percent, respectively.

Editor: Yang Lina

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About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
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