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« The Tail Wags the Dog | Main | The Taylor Rule: A Tool for Predicting Fed Policy »

The Reserve Bank of India raises Rates

The Hindu Logo 20 March 2010.JPG

In a surprise move The Reserve Bank of India raised their rates in an unscheduled move. With inflation heading towards the 10% level they have decided to apply the brakes a tad as explained in this snippet from The Hindu Online:

MUMBAI: The Reserve Bank of India on Friday raised its key short-term lending and borrowing rates by 25 basis points each as part of its tight money policy to combat inflation, which the government feels is a cause of concern.

The repo and reverse rates (short-term rates at which the RBI lends and borrows from banks) were hiked to 5 per cent and 3.5 per cent, respectively, and could make banks commercial lending dearer.

“These measures should anchor inflationary expectations and contain inflation going forward,” the RBI said a month ahead of the announcement of its annual monetary policy on April 20 for 2010-11.

Finance Minister Pranab Mukherjee had expressed concern saying inflation was heading to double digits from 9.89 per cent at present while at the same time not giving up on growth.

“As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected,'' the RBI said.

The decision to tighten monetary policy follows inflation surpassing the RBI's March-end projection of 8.5 per cent and the government's recent decision to hike prices of petrol and diesel.

WPI inflation

“Headline Wholesale Price Index (WPI) inflation on year-on-year basis at 9.9 per cent in February has exceeded our baseline projection of 8.5 per cent for end March 2010,'' the RBI said, justifying its decision to hike key rates ahead of its monetary policy.

Rising commodity and energy prices are exerting pressure on overall inflation, it said, adding that “the acceleration in the process of non-food manufactured goods and fuel items in recent months has been of particular concern.''

We now need to keep an eye on the actions of other nations who may well follow India's example and also raise rates, which in turn tends to render gold less appealing.

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Reader Comments (1)

excellent. all these poor countries , when scared with inflation, buy dollars like crazy. (and btw, they aren't raised yet, who knows how much they will rise really)

March 20, 2010 | Unregistered CommenterDi

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