RBI RATE

RBI hikes repo rate by 50 bps to 7.25%, savings bank deposit rates to 4%

The RBI has also increased the saving bank rate by 50 basis points to 4 per cent to give higher returns to depositors in the wake of high inflation.

The reverse repo, the rate at which bank park funds with RBI, has been raised by 50 basis points to 6.25 per cent.

RBI Governor D Subbarao announced these measures as part of annual credit policy to contain inflation, which is hovering around 9 per cent, and sustain economic growth in the medium-term.

RBI has pegged GDP growth rate for the current fiscal at 8 per cent against the government's projection of 9 per cent. The economy grew by 8.6 per cent in 2010-11.

Keki Mistry, CEO, HDFC Bank said, "50 basis point hike has not come as a surprise, bonds yields haven't changed much. Resurgence of inflation in first quarter has taken a lot of people by surprise."

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.

Standard Chartered Bank in a statement said, "RBI's hawkish stance will continue. There will be more tightening going ahead."

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.

"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.

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.

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