In a move to stem the rising prices, the Reserve Bank of India (RBI) on Tuesday hiked the short-term indicative policy rate (repo rate) by 50 basis points from 7.5 per cent to 8 per cent with immediate effect.
“Inflation continues to be the dominant macroeconomic concern.......... It is expected to remain elevated for a few more months, before moderating towards the later part of the year,” said the RBI Governor D. Subbarao while announcing the first quarter review of Monetary Policy for 2011-12, here.
The headline wholesale price index (WPI) inflation rate for the first quarter of this fiscal year remained stubbornly close to double digits and inflationary pressures continued to be broad-based. Both the “level and the persistence” of WPI inflation are a cause for concern, Dr. Subbarao added.
Suggesting a strong action by raising the rate by 50 basis points, beating the market expectation of 25 basis points, Dr. Subbarao said: “the policy actions will reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required”.
With the hike in repo rate (the rate at which banks borrow from the central bank) the reverse repo rate (the rate at which banks park their funds with the RBI), with a spread of 100 basis points below the repo rate, automatically adjusts to 7 per cent. Similarly, the Marginal Standing Facility (MSF) rate, with a spread of 100 basis points above the repo rate, stands recalibrated at 9 per cent.
The hike by the central bank in rates is likely to put further pressure on consumers as lending rates of banks will be higher in the coming days.
The RBI has also revised the WPI inflation projection for March 2012 from 6 per cent to 7 per cent. However, it has retained the projection of real GDP growth for the current year at 8 per cent.
Crude oil prices remain volatile and are a major risk factor. “The recent increase in domestic administered fuel prices and the minimum support price for certain food items will also keep inflation under pressure”.
The RBI Governor said that there were signs that growth was beginning to moderate, particularly in respect of some interest rate sensitive sectors. However, there was no evidence, as yet, of a sharp or broad-based slowdown.
The RBI feels that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate. The RBI governor said that fiscal consolidation could contribute to a sustainable growth path by rebalancing demand away from government consumption and towards investment.
“The economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand”