MUMBAI, June 24, 2008 (AFP) – India’s central bank unleashed a fresh round of monetary tightening Tuesday, raising its key short-term lending rate by half-a-percentage point after inflation hit a 13-year high of over 11 percent. The Reserve Bank of India raised its repo rate at which commercial banks borrow funds from the central bank to 8.5 percent from 8.0 percent with immediate effect.
It also announced a two-stage hike of the cash reserve ratio, or the amount of cash banks must hold in reserve, by 25 basis points to 8.50 percent effective July 5, and by another 25 basis points to 8.75 percent on July 19.
The RBI kept its key short-term borrowing rate, or the reverse repo rate, unchanged at six percent.
“Monetary policy has to urgently address aggregate demand pressures, which appear to be strongly in evidence,” the central bank said in a statement.
It is the second time the bank has increased the repo rate this month. It also hiked the cash reserve ratio twice in April as global prices of food and oil shot up.
“At this juncture, the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor expectations,” the RBI said.