MUMBAI, March 30: India’s central bank tightened its monetary policy again on Friday, saying it was “critical” to take action against stubborn inflation. It raised its key short-term lending rate and the amount of cash that commercial banks must hold on deposit, to suck out liquidity and fight inflation which has emerged as a problem as the economy booms.
The Reserve Bank of India hiked the key short term lending rate, known as the repo rate, by a quarter of a percentage point to 7.75 per cent and boosted the cash reserve ratio by half a percentage point to 6.5 per cent in a bid to take money out of the banking system.
“In view of current monetary and anticipated liquidity conditions, it is critical to take demonstrable and determined action on an immediate basis,” the bank said.
The move came after inflation remained stuck for a third week at 6.46pc, far above the bank’s tolerance band of 5.0 to 5.5 per cent, amid a booming economy.
“The hike in the cash reserve ratio would suck out Rs155 billion from the banking system,” the RBI statement added.
The further tightening of the cash reserve ratio had been forecast by economists, but not the repo rate.
“This is a clear signal for interest rates to go up further” when the RBI next considers its monetary policy on April 24, said Bidisha Ganguly, chief economist with brokerage BRICS Securities.
“Probably the RBI is panicking a bit... we did not expect an out-of-turn tightening” of the repo rate, she said.
This is the seventh repo rate increase since the RBI began raising the lending rate in October 2005.
Credit has been expanding by more than 30 per cent a year amid surging demand for services, manufactured goods and housing from an increasingly affluent middle class.
Authorities are trying to allow Asia's fourth-largest economy to move onto a higher growth path without letting inflation get out of control.—AFP
