RBI raises key rates to tame inflation

RBI raises key rates to tame inflation

The Reserve Bank of India on Thursday raised its key short-term lending rate by 25 basis points and borrowing rate by 50 basis points to check rising prices, a decision that will make loans expensive and help check inflation, but give better returns to small savers.

"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 4th September.

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

Industry chamber Ficci has expressed the fear that rising interest rates would hit business.

"Increasing repo rate is another signal of rising the cost of borrowing, hopefully it is the last such... restrictive action towards growth. We hope to see this restrictive policy eased in the next round", said Ficci secretary general Amit Mitra.

Expressing concern over the RBI move, PHD Chamber said, "This will adversely impact the cost of borrowing by the industry from the banks, especially by the SMEs. It may also the cost of home loan as well as consumer loans."

For RBI the major concern in inflation as "headline inflation remains significantly above the trend of 5.0-5.5 per cent in the 2000s.

"Inflation remains the dominant concern in macroeconomic management... (there is) need for continued policy response to contain inflation and anchor inflationary expectations," the RBI said.