RBI rate hike in line with expectations:

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. Commenting upon the RBI Monetary policy Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance say's “The Reserve Bank of India (RBI) continued with its measured approach to monetary tightening and hiked the policy rates by 25 bp, in line with our expectations. Since inflation remains well above the RBI’s comfort level further gradual hikes can be expected to anchor inflationary expectations. The recent upside surprise on inflation has been driven significantly by a spike in food and primary articles and may come off as short term factors fade. Thus we believe gradualism was the best approach and a sharp increase in rates was not warranted.”