RBI hikes repo rate by 0.50 points, CRR by 0.25 points to contain inflation

New Delhi, July 29 : Noting in its first quarter review that potential inflationary pressure from international food and energy prices are likely to remain so for some time, the Reserve Bank of India today increased the repo rate by 50 basis points and the Cash Reseve Ratio by 25 basis points with effect from August 30.

Home, consumer and other loan rates are expected to go up.

The Finance Mnistry said that the Government expects that the measures taken by the RBI will help in moderating and containing inflation.

The RBI also lowered economic growth projection to 8 per cent from its earlier forecast of 8-8.5 per cent in the face of difficult global economic situations.

RBI Governor Y V Reddy said that the main thrust of the policy would be to bring down inflation to 7 per cent by March, 2009 from the high 11-12 per cent, at present.

Earlier, the apex bank had set the attempt to bring down inflation close to 5 per cent by end of this fiscal and lowered it further to 4-4.5 per cent with a medium-term objective of 3 per cent.

The RBI said the surge in inflation reflected a combination of forces from global crude prices to domestic prices, inflationary pressures due to increasing global prices of key-commodities coupled with upward pressure in domestic prices.

"There are some signs of moderation in key monetary and banking aggregates in response to monetary measures, which have withdrawn liquidity from the system and tightened interest rates across the term-structure," the RBI said.

It also said the current situation was necessary to moderate monetary expansion and plan for a rate of money supply growth at around 17 per cent in 2008-09 in consonance with the outlook on growth and inflation so as to ensure macroeconomic and financial stability.

The mid-term review of the annual policy will be announced on 24th October, it said.

The last week's inflation was recorded as 11.89 per cent.

The CRR impounds funds available with the banks and the repo rate is the rate at which banks are allowed to access funds from the RBI for liquidity adjustment.

The increase in the CRR and the repo rate is a signal to the banks that credit growth must be moderated, having regard to the need to moderate aggregate demand.

If requests for loans are carefully appraised and credit is allocated prudently, it is possible for the banks to ensure that adequate credit is available to the productive sectors.

ANI