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RBI raises rates, inflation outlook

business Updated: Jan 25, 2011 23:33 IST
HT Correspondent

As widely expected, the Reserve Bank of India on Tuesday raised its policy interest rates by a quarter percentage point, squeezing money supply again in the economy in its battle to control price rise.

It also upped its inflation forecast, underlining a grim posture. For you, it could mean costlier consumer, home or auto loans in the days ahead.

The RBI, at its mid-term policy review, raised the repo rate, at which it lends to banks, by 25 basis points to 6.5%, while the reverse repo, at which it takes bank funds, rose by the same measure to 5.5%.

Such squeezes are aimed at making loans costlier to control demand, and thus, inflation. The RBI kept options open for a further squeeze on rates, even as it maintained that GDP growth would be a strong 8.5% in the current fiscal year, although it might ease the following year.

It revised up the benchmark inflation estimate based on wholesale prices to 7.0% at end-March from 5.5%.

"Inflation stemming from structural demand-supply mismatches in several non-cereal food items such as pulses, oilseeds, eggs, fish, meat and milk is likely to persist till supply response kicks in," said the RBI in its third quarter monetary policy review.

Banks are expected to pass on the RBI pinch within a month.

"I see two more rate hikes in the next two meetings and it will be a delicate balancing job. If inflation does not come down in six months then it will hit growth rate," said Ramit Bhasin, head of markets at RBS India.