RBI hikes rates to tame price rise

In a move to tame price rise, the Reserve Bank of India (RBI) on Tuesday hiked its short-term indicative lending rate by 25 basis points from 5.5 per cent to 5.75 per cent and borrowing rate by 50 basis points from 4 per cent to 4.50 per cent with immediate effect.

“The developments on the inflation front are worrisome,” RBI Governor D. Subbarao said here while announcing the first quarter review of the Monetary Policy 2010-11.

These monetary measures would “moderate inflation by reining in demand pressures and inflationary expectations and maintain financial conditions conducive to sustaining growth.”

This rate hike is likely to put pressure on banks to raise the lending rates on home, automobile and other commercial loans.

WPI inflation

While explaining the present price situation in the country, the RBI Governor said the Wholesale Price Index (WPI) inflation was in double digits since February. Primary food articles inflation, despite some moderation, continued to be in double digits. Between November 2009 and June 2010, non-food inflation rose from 0 per cent to 10.6 per cent and non-food manufactured inflation from 0 per cent to 7.3 per cent.

Significantly, said Dr. Subbarao, non-food items contributed over 70 per cent to WPI inflation in June 2010, suggesting that inflation was now very much generalised. “Inflation in terms of all four consumer price indices remains in double digits notwithstanding some decline in recent months.”

Taking into account the emerging domestic and external scenario, the baseline projection for WPI inflation for March 2011 was raised to 6 per cent from the RBI's April (annual) policy projection of 5.5 per cent.

GDP growth

The central bank has also raised the projection for real gross domestic product (GDP) growth for 2010-11 to 8.5 per cent, up from its April policy projection of 8 per cent with an upside bias.

This revision is primarily based on better industrial production and its favourable impact on the services sector while giving due consideration to the global scenario.