India: Central Bank raises interest rates by 50 basis points
July 26, 2011
At its policy meeting on 26 July, the Reserve Bank of India (RBI) raised interest rates by 50 basis points, pushing the repo rate to 8.00%. The decision surprised the market on the upside, as most analysts had expected the Bank to increase rates by just 25 basis points. Moreover, the move represents the 11th rate hike since the tightening cycle began in March 2010, when the RBI first increased the repo rate from a record-low of 4.75%. With the latest move, the RBI made clear its commitment to tame rampant inflation and anchor inflation expectations even at the expense of slower growth. The RBI highlighted that ?the challenge for the Government and the Reserve Bank is to ensure that demand is constrained in the short term to bring inflation down, but to encourage supply response so as to expand the potential output of the economy in the medium term.? In addition, the Bank stated that ?in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore.?