RBI ups lending rate by 25 bps, borrowing by 50 bps

The Reserve Bank of India today raised key interest rates more aggressively than expected in its efforts to curb galloping inflation. It raised its lending rate by 25 basis points and borrowing rate by 50 basis points.

"Inflation remains the dominant concern in macroeconomic management", RBI said while raising its repo (lending) and reverse repo (borrowing) rates to 6 per cent and 5 per cent respectively.

The new rates, which come into effect immediately, were announced as part of the first scheduled mid-quarterly review of the monetary policy. The hike in rates will lead to a rise in cost of funds for the banks and eventually makes loans expensive, which will reduce consumption.

While inflation for August was 8.5 per cent (as per the new series with 2004-05 as Base Year), food inflation was at a high of 15.10 per cent for the week ended 4 September. This is the fifth rate hike this year. RBI had raised these rates by an identical margin in July.

Economists had expected quarter point hikes in both rates.

Asia's third-biggest economy grew by 8.8 per cent in the June quarter from a year earlier, its fastest pace in nearly three years, while industrial output rose 13.8 per cent annually in July, the fastest since April. However, inflation remains a major worry for the government.

While inflation for August was 8.5 per cent (as per the new series with 2004-05 as Base Year), food inflation was at a high of 15.10 per cent for the week ended 4 September.

RBI has for the first time moved towards a six-weekly review of the state of the economy. The first of such reviews was released today.