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RBI hikes repo rate by 25 bps, reverse repo rate by 50 bps
September, 16th 2010

The Reserve Bank of India (RBI) on Thursday raised its key short-term lending rate by 25 basis points and borrowing rate by 50 basis points to check rising prices.

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

The new rates, which comes 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 September 4.

To check inflation, the RBI had raised these key rates by an identical margin in July.

Economists had expected quarter point hikes in both rates. This is the fifth rate hike this year.

Asia's third-biggest economy grew by 8.8 percent in the June quarter from a year earlier, its fastest pace in nearly three years while industrial output rose 13.8 percent annually in July, the fastest since April.

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

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