RBI policy in line with expectation:

The central bank also extended the 1% leeway in the SLR up to April 8. CRR has been left unchanged at 6%.

The Reserve Bank of India (RBI) on Tuesday increased the key policy rates by 25 basis points (bps) each, as the central bank steps up its efforts to tackle a stubbornly high inflation at the cost of some moderation in economic growth. The repurchase rate (repo rate) has been hiked by 25 bps to 6.50%, while the reverse repo rate has also been increased by 25 bps to 5.50%. The central bank also extended the 1% leeway in the SLR up to April 8. CRR has been left unchanged at 6%. The inflation target for FY11 has been increased to 7% from 5.5% earlier while the GDP forecast for the current fiscal year has been kept steady at 8.5% with an upward bias. The RBI had raised key policy rates six times last year as the Indian economy accelerated, sending inflation sharply higher. But several factors, including unseasonal rains and spike in global commodity prices has kept inflation elevated. Dr. D. Subbarao, Governor of the RBI had decided to take a pause in its last meeting on December 16 amid a severe shortage of cash in the banking system and some softening in food inflation. Inflation shot up to 8.43% in December, from 7.48% in the previous month, the Government said on January 14. October's inflation rate was revised to 9.12% as against the provisional estimate of 8.58%. Inflation in the Food Articles group fell to 15.52% in the week ended January 8 from 16.91% in the week ended January 1, the Commerce & Industry said on January 20. The RBI said today that the new actions are expected to: Contain the spill-over from rise in food and fuel prices to generalised inflation. Rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases. Be moderate enough not to disrupt growth. Continue to provide comfort to banks in their liquidity management operations. The next mid-quarter review of the Monetary Policy for FY 2010-11 will be announced through a press release on March 17, the RBI said today. The Monetary Policy for FY 2011-12 will be announced on Tuesday, May 3. S P Prabhu, Vice President- Fixed IncomeFund Management - IDBI Federal life Insurance Co ltd says “The debt market was expecting a 25bps hike in the Repo Rate and the policy announcements has been in line with market expectations. However, concerns over inflation remain, particularly on the food price front. Given the limited amount of Government Borrowing Program ahead in the current financial year, the market is expected to consolidate around the current levels. We expect the 10 year yield to be in the range of 8.00% - 8.50% over the next few months. The tight liquidity situation is a combination of large Government balances and robust credit off-take. The abnormally large Government balances problem is due to time mismatch in Government ‘s revenue and expenditure cycle and will self correct over the next couple of months. The structural problem on the liquidity front is that the growth in credit is 24% while deposit growth is slower at 16%. Banks will have to address the issue with a combination of aggressive deposit mobilization and higher deposit rates. The RBI decision to extend the 100bps regulatory forbearance on SLR till April will provide the much needed liquidity support to the market.”