RBI hikes repo rates, pegs FY06 growth at 7.5-8%

The Reserve Bank of India (RBI) today increased the fixed reverse repo and repo rates by 0.25% to 5.50% and 6.50%, respectively, and left the Bank Rate and cash reserve ratio (CRR) unchanged at 6% and 5%, respectively.

The central bank presented an optimistic view on economic growth by peggin GDP growth in the range of 7.5-8% for 2005-06.

Though inflation projection has been retained at 5-5.5%, RBI has said that domestic and global developments could put pressure on inflation. "In particular, the remaining pass-through of international crude prices into domestic prices of LPG and kerosene portends an upward bias to inflation in 2006-07," the central bank said.

Stressing a pre-emptive response to developments, the central bank also indicated a rise in aggregate demand with a spill over into the external sector resulting in widening trade and current account deficits.

RBI said the Indian economy has entered an expansionary phase of business cycle, and the current account deficit (CAD) of $13 billion in the first half of 2005-06 should be regarded as "consistent with the scaling up of the growth path."