The Reserve Bank today hiked its short term lending rate by 0.25 per cent with immediate effect, a move that is likely to force banks to increase interest rates and help check inflation.
"The Reserve Bank of India has decided to increase the repo rate by 25 basis points to 8.00 per cent from 7.75 per cent with immediate effect," the central bank said in a statement in Mumbai.
The reverse repo rate, at which RBI borrows money from banks in exchange of the government papers, however, has been kept intact at 6 per cent.
The Reserve Bank said the decision has been taken with a view to containing inflation expectations among other things.
The RBI statement said: 'The annual policy statement for the year 2008-09 (April 29, 2008) had stated, inter alia, that the overall stance of monetary policy in 2008-09 will broadly be to ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.'
'Further, it was proposed to respond swiftly on a continuing basis to the evolving constellation of adverse international developments and to the domestic situation impinging on inflation expectations, financial stability and growth momentum, with both conventional and unconventional measures, as appropriate.'
'The year-on-year WPI inflation which was 4.36 per cent on January 12, 2008 (at the time of announcement of the third quarter review for 2007-08) increased to 7.33 per cent on April 12, 2008 (at the time of announcement of the annual policy statement for 2008-09) and to a high of 8.24 per cent on May 24, 2008.'
'Further, various measures of CPI inflation, which ranged from 4.8 to 5.9 per cent in January 2008 have increased to a range of 7.8 to 8.9 per cent in April 2008.'
'The annual policy statement for the year 2008-09 (April 29, 2008) had referred to the unprecedented uncertainties and dilemmas that exist and added "while monetary policy has to respond proactively to immediate concerns, it cannot afford to ignore considerations over a relatively longer term perspective of, say, one to two years, with respect to overall macroeconomic prospects.'
'At the same time, it is critical at this juncture to demonstrate on a continuing basis a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations.'
'In light of the above, and on a review of the current macroeconomic and overall monetary conditions and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis.'
'Accordingly, the Reserve Bank of India has decided to increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points to 8.00 per cent from 7.75 per cent with immediate effect. There is no change in the reverse repo rate.'