India tightens again to fight inflation

The Reserve Bank of India has again raised interest rates in an attempt to combat stubbornly high inflation.

Based on an assessment of the current macroeconomic situation, the bank decided to increase the repo and reserve repo rates by 25 basis points each. They now stand at 6.5% and 5.5% each.

However, the net cash reserve ratio (CRR) remains unchanged at 6%.

Since mid-March last year, the reserve bank has cumulatively increased the repo rate by 175 basis points (bps) and the reverse repo rate by 225 bps. The CRR was increased by 100 bps.

Banks have responded to this calibrated tightening by raising their deposit and lending rates, suggesting monetary policy is feeding through to the private sector. (article continues below)

The reserve bank also decided to provide additional liquidity support of up to 1% to scheduled commercial banks under the liquidity adjustment facility (LAF), with a daily second LAF up to April 8.

In a statement, the reserve bank says inflation is its “dominant concern”. Over the past couple of months, primary food articles inflation has once again risen. Non-food articles inflation and fuel inflation are also up.

“Even as the rate itself remains unacceptably high, the reversal in the direction of inflation is striking,” the statement continues.