RBI hikes repo rate, CRR to 9 percent

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Last month, RBI hiked the repo rate, or the key lending rate at which the central bank lends funds to commercial banks, from 8 percent to 8.50 percent, and the cash reserve ratio (CRR) or the proportion of reserves the commercial banks must keep with the central bank, from 8.25 percent to 8.75 percent to tame inflation.

Following the latest round of hike, the repo rate and the CRR stand at 9 percent. This is the first time since October 2000 that repo has touched 9 percent while CRR touched 9 percent for the first time since late November 1999.

The bank rate, used to price medium- and long-term loans, and the reverse repo rate, used to absorb excess cash from banks, have been kept unchanged at 6 percent each.

The hike would help bring down inflation, which is presently at 11.89 percent, to "tolerable level" and ensure "macroeconomic and financial stability," RBI said.

"While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5 percent as soon as possible and around 3 percent over the medium-term, at this juncture a realistic policy endeavor would be to bring down inflation from the current level of about 11-12 percent to a level close to 7 per cent by March 31, 2009," the apex bank said in a statement.

"To ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum," RBI warned that it would continue to be vigilant and make "timely policy responses" though "there are early signs of some moderation in money supply and deposit growth."

RBI has also revised India's GDP growth projection for 2008-09 from 8-8.5 percent to around 8 percent, barring domestic or external shocks.

According to RBI, the main driving force behind India's inflation is high crude oil prices, which have increased by 60 percent since July 2007.

"The upsurge in inflation during the current financial year reflects a combination of forces at work: the pass-through of international crude prices to domestic administered prices effected on June 5, 2008; inflationary pressures in addition to crude oil prices; and movements in international prices of key commodities indicating elevated upside pressures for domestic prices of a number of commodities with implications for the evolving scenario," it said.

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