RBI raised repo & reverse repo rate
RBI raised the repo and reverse repo rates by 25bps. Repo rate has been increased from 6.25% to 6.50% and reverse repo rate from 5.25% to 5.50% with the immediate effect. The rates have been increased to contain inflation and anchor inflationary expectations.
The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0%. The Bank Rate has been retained at 6.0%.
WPI inflation for March 2011 is revised upwards to 7.0% from 5.5%. The M3 growth has been retained at 17% and non-food credit growth at 20%.
RBI policy reveals that recent inflation dynamics has tilted towards intensification of inflation. In this scenario, the stance of the monetary policy is intended to
a. Contain the spill-over of high food and fuel inflation into generalised inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures.
b. Maintain an interest rate regime consistent with price, output and financial stability.
c. Manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows
However, the monetary tightening that has been carried out over the last one year has not tackled the inflationary scenario. Notwithstanding slight moderation, inflation remains significantly above (at 8.43% during Dec2010) the comfortable zone. Food inflation has also been entered the double digit growth trajectory once again. Tight monetary policy may not be an effective tool to control inflation which is mainly due to structural supply side constraints, in our view.
This is for information of the members.
Kind regards,
Dr. S P Sharma
Chief Economist
PHDCCI
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