RBI Annual Monetary Policy: Interest on Saving Bank's Up

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Mumbai, May 3: The most significant announcement from the Reserve Bank of India that will bring cheers for the common man was to raise interest rates on savings bank deposit from 3.5% to 4%. And the Reserve Bank of India also announced that it will raise the reverse repo rate by 50 basis points. This was done in an effort to fight inflation, which is of high priority now and it is above short-term growth in terms of importance. 

This is the ninth time when rates have been hiked, since March 2010. Since, the March headline inflation was touching the 9%, a section of economist were stating for more aggressive move by RBI than its usual 25 basis points.

RBI also said that high crude and commodities prices along with the impact of policy measures should moderate the growth of about 8% for the current fiscal year, assuming a normal summer monsoon and global crude rate at $110 per barrel.

D. Subbarao, Governor RBI stated in the annual monetary policy statement, "Current elevated rates of inflation pose significant risks to future growth." He further added, "Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence."

Repo rate has also been lifted by RBI to 7.25%, the rate at which the central bank lends to banks.

RBI expects inflation to maintain at the March levels for now. It has set a target of 6% headline inflation, with an upward bias, for the end of the fiscal year, March 2012.

Subbarao opined that maintaining price stability is must in order to sustain medium term growth. He said, "Persistently high rates of inflation raise the risks of inflationary expectations becoming unhinged."

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