The Reserve Bank of India (RBI) made a surprise pull on Friday with a sudden increase in two of its policy rates, apparently worried by the prospect of a rise in inflation in the backdrop of concerns over monsoon rains.
The central bank, which was due to review its policy on July 27, moved quickly to increase the repo rate, at which it borrows from banks, and the reverse repo rate, at which it lends to banks, by 25 basis points (0.25 percentage point) each.
“The monetary measures should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process,” said the RBI in its statement.
“The developments on the inflation front… raise several concerns. Inflation increased to 10.2 in May 2010 from 9.6 per cent in April. Food inflation and consumer price inflation remain at elevated levels,” it said.
To ensure that banks do not run out of money for loans, the RBI also took steps to ease liquidity by extending additional support. Liquidity was under pressure as companies borrowed to make payments towards 3G telephony spectrum and advance tax.
“The RBI’s action is consistent with its gradual normalization of policy rates towards a level consistent with the economic growth in a non-disruptive manner,” said Chanda Kochhar, CEO, ICICI Bank.
RBI is confident of the strong growth momentum led by the upturn in the capital goods sector and acceleration in credit growth it continues to remain cautious on the domestic inflationary pressures and global recovery process on account of uncertainties in Europe.