A Ninth Rate Hike for India

May 3, 2011

The Reserve Bank of India raised its repo rate by 50 basis points to 7.25%.  There have been nine increases since the first one in March 2010, three by 50 basis points including today’s and six by 25 basis points including the previous three moves in March, January, and November.  Monetary policy makers left reserve requirements unchanged at 6.0% and announced an operational change.  Henceforth, the key central bank borrowing rate, also known as the reverse repo rate, will no longer be set independently but will instead move in automatic lock-step with the repo rate and remain 100 basis points below such.  So the reverse repo rate becomes 6.25%, up from 5.75%.  Prior to March 2010, the repo rate had been 300 basis points lower than now at 4.25%.

A statement from central bank officials stressed that containing inflation must remain the top immediate priority and observed that WPI inflation from December 2010 to March 2011 of 3.4% was nearly twice as strong as the 1.8% rise in the prior four months.  Growth in the financial year 2011/12 is projected to be around 12%.  The statement concludes, “High and persistent inflation undermines growth by creating uncertainty for investors, and driving up inflation expectations. An environment of price stability is a pre-condition for sustaining growth in the medium-term. Reining in inflation should therefore take precedence even if there are some short-term costs by way of lower growth”.  On-year inflation is running above 8.0%.

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



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