RBI hikes short-term rates to beat down inflation

The Reserve Bank of India (RBI) today raised its short-term lending and borrowing rates by a higher than expected 0.25 per cent and 0.50 per cent respectively in an avowed attempt to bring the double-digit inflation down to six per cent by March 2011, in a move that would put pressure on banks' interest rates.

In its monetary review, the central bank however kept the cash reserve ratio (CRR), the cash which banks are required to keep with the RBI, unchanged as liquidity is tight in the system following over Rs1 lakh crore outgo due to payments by telecom companies for acquiring spectrum.

The RBI raised upwards the inflation target from 5.5 per cent to 6 per cent and said that the economy will grow by 8.5 per cent, up from its earlier projection of 8 per cent, this fiscal.

The increase in short-term lending rate (repo) to 5.75 per cent and short-term borrowing rate (reverse repo) to 4.5 per cent will be effective immediately.

Earlier this month, the RBI had hiked repo and reverse repo rates by 0.25 per cent as inflation remained above 10 per cent for the fifth month in succession. Prior to this, the RBI had raised thrice its key rates since January.

''Inflationary pressures have exacerbated and become generalised with demand side pressures clearly visible ... given the spread and persistence of inflation, demand-side inflationary pressures need to be contained,'' the central bank said in a statement from Mumbai.

The RBI's projection of a higher inflation than the earlier estimate could partly be attributed to the government's move of raising fuel prices. The bank said there can be an up to one per cent impact on the wholesale price index owing to the fuel price rise.