Reserve Bank of India Beats Forecast on Rate Hike
The Governor of Reserve Bank of India, Duvvuri Subba Rao could not allow himself to lag behind the trend of beating forecast by growth numbers of India. At the quarterly review meeting on September 16, 2010, the RBI raised interest rates more aggressively than expected. The RBI lifted repo rate, at which it lends to banks and other financial intermediaries, by 25 basis points to 6 percent. It also lifted reverse repo rate, at which RBI absorbs the cash from the system, by 50 basis points to 5 percent.
The deference between the repo rate and reverse repo rate is decreased from 1.25 percent to 1 percent, signalling that the central bank is committed to control the high rate of inflation. "Inflation remains the dominant concern in macroeconomic management," the central bank said in a statement released to reporters. “Monetary Policy Review: September 2010,” almost confirmed that the inflation rates have reached their peak, but cautioned it is likely to remain at unacceptably high levels for some months.
Several factors prompted the central bank to rein in the inflation, which is still nearer to the double-digit figure. Almost double the forecast growth (13.8 percent) of Industrial output in July 2010; rocket speed rise of the share markets; and robust annualized growth rate of GDP (8.8 percent) for the quarter ending with June 2010 necessitated controlling the money supply in the system.
Pause in tightening
Analysts are predicting that this could be a signal for pause in policy tightening pursuit. As the growth side is appearing to be consolidated, the policy makers may now be in pursuit of taming the inflation. However, the Republic of Korea signaled in other direction with its surprise holding of interest rates. Korea might have taken cue from the growing volatility and uncertainty of the global growth.Continued on the next page