The Reserve Bank of India (RBI) on Thursday hiked the key policy rates by 25 basis points (bps) in its ongoing fight against stubborn inflation, showing increasing preference for price stability in the growth-inflation tradeoff.
The repo rate now stands at 7.50%. The reverse repo rate will be 100 bps lower than the repo rate at 6.50%.
The bank rate and the CRR have been left unchanged at 6% each.
Today's policy action is expected to contain inflation and anchor inflationary expectations by reining in demand side pressures and mitigate the risk to growth from potentially adverse global developments, the RBI said in a statement.
The RBI also said that based on the current and evolving growth and inflation scenario, it will need to persist with its anti-inflationary stance of monetary policy.
The markets hardly reacted to the RBI's announcement immediately.
The BSE Sensex and the NSE Nifty remained virtually unchanged after the RBI move. The rupee too stayed more or less static.
However, the yield on the 10-year benchmark Government bond inched up by a few bps as against its level prior to the RBI action.
But, the Sensex and the Nifty lost about 1% each by the close of trade, while the rupee hit a two-week low against the US dollar. The yield on the benchmark 10-year Government note snapped a three-day advance despite the 25-bps rate hike.
India needs better price stability for sustaining growth in the medium term, Finance Minister Pranab Mukherjee said today in reaction to the RBI raising rates for the tenth time in the last 15 months.
Separately, R. Gopalan, Economic Affairs Secretary in the Finance Ministry said that the RBI's latest monetary tightening could impact economic growth in the short-term.
The headline WPI inflation rate remains elevated, consistent with the projections made in the Annual Policy, the central bank said. The main drivers of inflation in April-May were non-food primary articles, fuel and non-food manufactured products, it said.
The above trend inflation in non-food manufactured products is a matter of particular concern, the RBI said. Besides reflecting high commodity prices, it also suggests more generalised inflationary pressures, it added.
Rising wages and costs of service inputs are apparently being passed on by producers along the entire supply chain, the RBI said.
The domestic growth outlook as indicated in the Annual Policy remains unchanged, the RBI said. However, given the high degree of integration with the global economy, recent global macroeconomic developments pose some risks to domestic growth, it added.
Domestic inflation remains high and much above the comfort zone of the central bank, the RBI said today. What's worse, domestic fuel prices do not yet reflect the current trends of global prices, the RBI warned.
Monetary transmission has strengthened, but the impact of the recent monetary policy actions is still unfolding, according to the central bank. The challenge of containing inflation and anchoring inflation expectations persists, the RBI said.
Thus, while the RBI needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse movements in inflation with recent global developments and their likely impact on the domestic growth trajectory, it said.
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