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RBI ups repo and reverse repo rates by 50bps, CRR unchanged
May, 03rd 2011

Reserve Bank of India, in its first monetary policy review of 2012, raised repo and reverse repo rates by 50 basis points taking repo (rate at which it lends to banks) to 7.25% and reverse repo (rate at which it borrows) to 6.25%. However, the CRR has been left unchanged at 6%.

The rate rise was its ninth since March 2010, and exceeded market and economists' expectations for a 25 basis point rise, although the case for stronger action had been building since March headline inflation reached nearly 9 percent.

The central bank said high prices of oil and other commodities and the cumulative impact of its policy measures will lead to moderating growth of about 8 percent for the current fiscal year, assuming a normal summer monsoon and global crude oil prices of $110 a barrel.

Asia's third-largest economy grew by an estimated 8.6 percent in the year that ended in March 2011.

"Current elevated rates of inflation pose significant risks to future growth," Reserve Bank of India Governor Duvvuri Subbarao said in the bank's annual monetary policy statement.

"Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence," he said.

The Reserve Bank of India lifted its repo rate, at which it lends to banks, to 7.25 percent.

Under a new arrangement, the repo rate becomes the central bank's only independently varying policy rate, and the reverse repo rate , at which the RBI absorbs excess liquidity, will be pegged 100 basis points below the repo rate, or 6.25 percent after Tuesday's increase.

The RBI said it expects inflation to remain elevated near March levels in the first half of the fiscal year that began in April before easing in the second half, and set a target of 6 percent headline inflation, with an upward bias, for the end of the fiscal year in March 2012.

Subbarao said maintaining price stability is required to sustain medium term growth.

"Persistently high rates of inflation raise the risks of inflationary expectations becoming unhinged," Subbarao said.

Analysts polled recently by Reuters had expected 75 basis points of rate increases for the remainder of 2011, including Tuesday's move.

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