RBI raises repo and reverse repo by 25bps

The Reserve Bank of India on Tuesday hiked repo rates by 25 basis points (at which it lends to commercial banks) to 6.25 per cent and the reverse repo rate by 25bps (which it pays to banks for deposits) to 5.25 per cent.

The hike is the sixth time this year to stem inflation that remains well above its comfort zone of 5-6 per cent.

The RBI, however, left the cash reserve ratio or bank rate, which is the amount of cash that banks have to park with the central bank to maintain prudential norms, unchanged at 6 per cent.

“These changes will be with immediate effect,” the RBI said while announcing the second quarter monetary policy review.

It said the rate action was relatively low in the immediate term.

So far, RBI has hiked the repo rate by 125 basis points (bps) –one basis point is 0.01 per cent– and the reverse repo by 175 bps, while it spiked the CRR by 100 basis points in two installments to tame inflation and to normalize the easy monetary and fiscal policies which were initiated by the RBI and government following the global financial crisis in September 2008.

The annual wholesale price index for September, the last key data point before the central bank’s Nov. 2 review, rose 8.62 percent compared with 8.5 per cent in August.

Annual food price inflation eased to 13.75 per cent in mid-October but remains high, in part because of rising demand as incomes increase.

The RBI said overall inflation, which stood at 8.62 per cent in September, was “above the comfort level,” even as it retained economic growth outlook for the current fiscal at 8.5 per cent.

It noted that uncertain global outlook, and the dominance of supply rigidities in certain sectors that impart rigidity to the inflation path, pose greater challenges for monetary policy.

The RBI said the credit to non-food sectors was healthy and that loan disbursals to agriculture sector was declining.