India Monetary Policy


Central Bank leaves rates unchanged

On 16 December, the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 6.25% and the reverse repo rate from 5.00% to 5.25%. The decision marked a pause in the tightening cycle, following on six consecutive rate hikes. In addition, the move came in line with market expectations and with previous statements of RBI Governor Duvvuri Subbarao who, following the 2 November meeting, had declared that the probability of further additions to borrowing costs in the ?immediate future? would be ?relatively low?. The RBI acknowledged the strong momentum of the domestic economy, buttressed by a recovery in the agricultural sector due to a positive monsoon season, and picking-up industrial activity. According to RBI, although inflation has moderated in the recent months, upside risk persist due to demand-pull pressures and ?higher global commodity prices?. However, the main concern in this month monetary policy decision was the necessity to provide liquidity to the economy, which had suffered of liquidity shortage in line with the tight monetary policy stance adopted by RBI in recent months. Accordingly, RBI justified the decision of leaving interest rates unchanged stating that the move would ?alleviate the liquidity pressure in a manner consistent with the monetary policy stance of containing inflation and anchoring inflationary expectations?. The next monetary policy meeting is scheduled on 25 January. As inflationary pressures remain strong, most market analysts expect the Reserve Bank to resume the tightening cycle in next meeting. Consensus Forecast panellists anticipate that the monetary tightening cycle will resume before the end of the current fiscal year, ending in March 2011. On average, the panel expects the RBI to raise interest rates to 6.45% by the end of this fiscal year. By the end of the fiscal year 2011/12, the panel projects rates to increase further to an average of 7.08%.

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