The central bank raised interest on Tuesday in the face of inflation has been above 10 percent for the past five months. The Reserve Bank of India said it would continue to normalize policy in line with the growth and inflation rate in the economy.
The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by a steeper than expected 50 basis points to 4.50 percent.
The central bank left the cash reserve ratio (CRR) unchanged at 6 percent.
Inflation in India emerged last year in the wake of a poor monsoon that drove up food prices but has spread broadly throughout the economy, spawning protests against a government whose voter base is predominantly poor and rural. New Delhi’s decision to increase fuel prices is expected to add nearly a percentage point to wholesale price index (WPI) inflation starting in July and led the opposition to call a one-day nationwide strike early this month.
The government is hoping on normal summer monsoon rains to results in better crop yields and ease pressure on food prices, and has said inflation should decline to 6 percent by December, which in my opinion is a task in itself…..