India Monetary Policy


India: Central Bank raises interest rates

February 25, 2011

At its latest meeting on 25 January, the Reserve Bank of India (RBI) increased interest rates by 25 basis points, pushing the repo rate to 6.50%. The decision was widely expected by the market, as wholesale price inflation had spiked to 8.4% in December, amid higher food prices. Moreover, the decision continued the policy tightening cycle that has entailed a cumulative increase of 175 basis points in the repo rate since March 2010. The RBI reaffirmed that inflation, which remains ?unacceptably high?, was its main concern, and recent surges in prices for food and fuel were showing signs of filtering into generalised inflation. In the same vein, the Bank acknowledged both demand and supply side price pressures were rising. Moreover, higher commodity prices in global markets are placing additional pressure on inflation on the supply side. On the other hand, the RBI stated that demand-side pressures were visible in the medium term, as the economy maintains its strong growth momentum led by the domestic sector.


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