Special Correspondent

MUMBAI: Worried at the prospects of price increase and higher rates of inflation, the Reserve Bank of India on Tuesday introduced measures to make it costlier for banks to borrow funds from the apex bank for the short-term.

By raising the "repo rate" from 7 to 7.25 per cent and at the same time not increasing the rate the RBI would pay banks for borrowing money from them in the short-term, the apex bank has signalled a higher cost of finance in the economy over a period.

Banks will be motivated to pay higher interest on deposits mobilised from the public as a result of the RBI decision and this in turn will force them to raise their lending rates.

Y.V. Reddy, Governor, RBI, unveiling the mid-term review of its monetary policy, said there were enough reasons to worry about a possible increase in inflation despite the downtrend in international oil prices.

A portion of the oil price increase had a "permanent element" which might have to be passed on to the consumer sooner or later. Other factors which heightened inflationary expectations were an increase in the prices of primary food articles that was more than in the case of other goods, productivity gains in the economy being offset by a "squeeze" on profits owing to international competition and an uptrend in commodity prices in world markets.

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