India's central bank raises repo rate by 25 points

Tuesday, 31 October 2006, 08:00 Hrs
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Mumbai: The Reserve Bank of India (RBI) on Tuesday increased its repurchase rate by 25 basis points, initiating measures to curb inflation that has jumped to a four-month high - at the same time, keeping an eye on economic growth.

The bank rate - benchmark interest charged by the Reserve Bank for borrowings by banks - as also the reverse repurchase rate and the cash reserve ratio have been left unchanged in the half-year review of the monetary policy for 2006-07.

Releasing the new policy rates here Tuesday, RBI Governor Y.V. Reddy said the RBI would ensure growth while reinforcing price stability in its bid to contain inflation trends.

The repurchase, or repo rate - the interest charged at the time of repurchasing government securities - now stands at 7.25 percent. An increase in repurchase rate adds liquidity to the system.

The reverse repo rate and the bank rate currently stands at six percent, while the cash reserve ratio - the liquidity assets the banks have to keep vis a vis deposits - has been steady at five percent.

The RBI also increased its economic growth forecast for the current fiscal from between 7.5-8 percent to a "around" eight percent and said it expected inflation to be at around 5-5.5 percent by the end of the year.

The annual rate of inflation, based on wholesale prices, stood at 5.26 percent for the week ended October 12, the latest period for which data is available. The central bank said this needed careful monitoring and prompt action.

"The RBI's optimism stems from the fact that the overall industrial outlook, which has improved in relation to the assessment made earlier in July," said economist Vidyut Kumar.

"But RBI alone cannot control the entire environment. Companies are free to and can easily raise money from abroad, so we do not expect long-term rates to go up," Kumar told IANS.

The banking sector, which does not expect any immediate increase in loan rates, has taken a wait and watch stance.

"We do not expect loan rates and deposit rates to go up immediately as banks will be able to tackle the hike. They (banks) may prefer to wait and watch the situation before hiking rates," said a senior official at the Bank of Maharashtra here.

Source: IANS
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