India: Central Bank tightens monetary policy
March 17, 2011
At its latest policy meeting on 17 March, the Reserve Bank of India (RBI) raised interest rates by 25 basis points, pushing the repo rate to 6.75%. The decision was widely expected by the market, as wholesale price inflation remains high following December's food price spike. The decision continued the policy tightening cycle that has recorded a cumulative 200 basis point increase of the repo rate since March last year. The RBI acknowledged that food inflation is finally yielding, but higher prices for non-food manufacturing products are offsetting this effect. Moreover, the rise in international commodity prices, in particular oil, fuelled by the ongoing political turmoil in the Middle East and North Africa, indicate that ?risks to inflation remain clearly on the upside.? As a result, the Bank voted to raise interest rates in order to stem demand-side pressures. Meanwhile, an RBI working group advising on the operating procedure of monetary policy recommended that ?the repo rate should be the single policy rate to unambiguously signal the stance of monetary policy?, and that the interest rate corridor between the Bank Rate and the reverse repo rate ?should change automatically? as the repo rate changes.