RBI raises repo rate
by Brian Turner
The Reserve Bank of India (RBI), India’s central bank, left bank rates unchanged at 6 percent on Thursday. But it raised the repo rate, the interest rate paid by banks on short-term funds overnight, by 25 basis points to 5 percent.
The RBI reported that they believed inflation would remain stable at between 5 percent and 5.5 percent in the year ahead. However, the wholesale price index has again begun to climb again and is currently at 5.48 percent. This index is India’s main inflation index.
Analysts believe that if India’s inflation rate passes above 6 percent, the RBI might be forced to raise the benchmark interest rate. The expectation is that the bank rate will rise by 50 to 75 basis points by the end of the year.
It has been suggested that the RBI has three ways to achieve price stability and a steady inflation rate. They can tighten monetary policy. They can strengthen the rupee by intervening in currency markets to make oil imports effectively cheaper. Or, they can lobby the government to lower duties.
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