RBI's anti-inflationary stance: hikes interest rates by 50 basis points

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Increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points. The repo rate will accordingly move up from 7.5 per cent to 8.0 per cent

Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, automatically adjusts to 7.0 per cent. Similarly, the Marginal Standing Facility (MSF) rate, determined with a spread of 100 bps above the repo rate, stands recalibrated at 9.0 per cent.

Expected Outcomes

The expected outcomes of today’s policy actions are the following:

• First, the cumulative impact of past actions on demand will be reinforced;

• second, the credibility of the commitment of monetary policy to controlling inflation, and thereby to keeping medium-term expectations anchored, will be maintained;

• and, third, the policy actions will reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required.

It is important to recognise that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore. The economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand.

Our baseline projection for WPI inflation for March 2012, as indicated in the May 3 policy statement, was 6.0 per cent with an upward bias. We have reviewed that projection. Keeping in view the domestic demand-supply balance, global trends in commodity prices and the likely demand scenario, we have revised the baseline projection for WPI inflation for March 2012 upward to 7.0 per cent. Let me reiterate what we said earlier, which is that inflation is expected to remain elevated for a few more months, before moderating towards the later part of the year.

The current trends in money supply (M₃) and credit growth remain above the indicative trajectory of the Reserve Bank. Keeping in view the evolving growth-inflation dynamics, the indicative projection of M₃ growth for 2011-12 has been revised downwards from 16.0 per cent, as set out in the May 3 Policy Statement, to 15.5 per cent. Non-food bank credit growth projection has also been revised downwards from 19.0 per cent to 18.0 per cent.