RBI Hikes Interest Rates for Sixth Time this Year

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Nov. 3 – India’s central bank raised interest rates on Tuesday for the sixth time this year, but said that rates will probably remain stable for the next three months.

The Reserve Bank of India, which has tightened its monetary policy the most in Asia this year, increased the repurchase rate, or lending rate, by a quarter point to 6.25 percent and the reverse repurchase rate, or borrowing rate, by the same margin to 5.25 percent. The RBI also tightened rules for residential home loans, explaining that a “sharp rise in asset prices in such a short time causes concern.”

The RBI cited inflationary concerns as the key reason for the hike as overall inflation in India is now down to about 8.5 percent. Food inflation, however, remains high at a rate of roughly 15 percent. Despite persistent inflation issues in India, the RBI said that the new rates will remain stable for the near future barring any shocks to the economy.

“Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate action in the immediate future is relatively low,” the RBI said in its policy review for the second quarter of the 2010-2011 fiscal year. “Given the spread and persistence of inflation, demand side inflationary pressures need to be contained and inflationary expectations anchored.”

RBI Governor Duvvuri Subbarao confirmed these sentiments at a press conference in Mumbai yesterday, saying that the country’s interest rates will be stable for at least three months.

“Immediate future rate action is unlikely barring some shocks,” he said. “The question is what is immediate future? I would believe it is three months.”