Reserve Bank of India Implements its Eighth Rate Increase Since March 2010

March 17, 2011

In order to counter demand-side inflationary pressure and inflation expectations, monetary officials in India raised their key repo lending rate and reverse repo borrowing rate by 25 basis points each to 6.75% and 5.75%, respectively.  This follows a similar move on January 25th and six tightenings last year made in March, April, July (twice), September and November.  The repo rate is now 200 basis points above its trough, and the reverse repo rate has been lifted by 250 bps.  Previously, six cuts from October 2008 to April 2009 had slashed the repo rate from 9.0% to 4.75%.

The Reserve Bank of India released a statement noting greater inflationary risks stemming in part from higher oil prices but also more risk to growth.  An on-year 8.31% rate of WPI inflation in February compares to 7.48% three month earlier, and wholesale price inflation for non-food manufactured goods accelerated to 6.1% in February from 4.8% the month before.  Real GDP is expected to growth 8.6% in the current fiscal year, with a current account deficit equal to 2.5% of GDP.  The statement implies there will be more interest rate increases in the future.  However, reserve requirements were left at 6.0%.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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