The Reserve Bank of India (RBI) today increased its key benchmark rates to rein in a rising inflation rate and demand pressure. The cash reserve ratio, however, has been kept unchanged.
In the First Quarter Review of Monetary Policy 2010-11 announced on Tuesday, the central bank increased repo rate by 25 basis points from 5.5 per cent to 5.75 per cent. The reverse repo rate has been increased by 50 basis points from 4 per cent to 4.50 per cent. Meanwhile, CRR remains unchanged at 6 per cent.
Repo rate is the rate at which banks borrow from RBI. Reverse repo rate is the rate at which the central bank borrows money from banks.
According to the RBI's first policy review, the monetary actions are expected to moderate inflation by reining in demand pressures and inflationary expectations, maintain financial conditions conducive to sustaining growth, generate liquidity conditions consistent with more effective transmission of policy actions and reduce the volatility of short-term rates in a narrower corridor.
The central bank has also revised upwards the GDP growth rate. "Taking into account the progress of monsoon so far and the prevailing global macroeconomic scenario, for policy purposes, the baseline projection of real GDP growth for 2010-11 is revised to 8.5 per cent, up from 8 per cent with an upside bias as indicated in April 2010 policy statement," said the policy statement.
This upward revision is primarily based on better industrial production and its favourable impact on the services sector, giving due consideration to the global scenario, it explains.
The inflation projection has also been raised to 6 per cent. "Taking into account the emerging domestic and external scenario, the baseline projection for WPI inflation for March 2011 has been raised to 6 per cent from 5.5 per cent as indicated in the April policy statement," says the review statement.