Reserve Bank of India Tightens By More Than Expected

July 26, 2011

India’s repo and reverse repo rates were increased by 50 basis points each to 8.0% and 7.0%.  The repo rate has been raised five times so far in 2011 by a combined 175 basis points.  Such follows six increase during 2010 totaling 250 basis points.  The cash reserve requirement ratio was kept steady at 6%.

A statement from RBI Governor Subbarao made a number of pertinent comments.

  • “Controlling inflation is imperative both for sustaining growth over the medium-term and for  increasing the potential growth rate.”
  • “The growth momentum remained strong throughout last year. However, data for the first two months of this fiscal, April-May 2011, suggest that some moderation might be under way.”
  • “Inflation continues to be the dominant macroeconomic concern.  Inflationary pressures are clearly very strong, notwithstanding signs of moderation of economic activity. Importantly, the softening of commodity prices over the past three months did not translate into a decline in either headline WPI inflation or non-food manufactured products inflation.”
  • “We have revised the baseline projection for WPI inflation for March 2012 upward to 7.0 per cent. Let me reiterate what we said earlier, which is that inflation is expected to remain elevated for a few more months, before moderating towards the later part of the year.”
  • “The credibility of the commitment of monetary policy to controlling inflation, and thereby to keeping medium-term expectations anchored, will be maintained.”
  • “The challenge for the Government and the Reserve Bank is to ensure that demand is constrained in the short term to bring inflation down, but to encourage supply response so as to expand the potential output of the economy in the medium term.”

Copyright 2011, Larry Greenberg.  No secondary distribution without express permission.



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