RBI: widening spread reflects uncertainties

MUMBAI (Reuters) - The widening spread between the Reserve Bank of India's main lending and borrowing rates reflects greater economic uncertainties, its governor said in a speech published on Wednesday.

The differential between RBI's main lending rate, the repo rate, and its reverse repo rate, which it uses to absorb cash from the market, is currently 250 basis points, from 100 basis points in 2006.

The RBI last raised the repo rate on June 24, by 50 basis points to 8.5 percent, but left the reverse repo unchanged at 6.0 percent, where it has been since July 2006.

"A dynamic balance is evident from the spread between the repo and reverse repo rates, which is enlarged during times of uncertainties," Governor Yaga Venugopal Reddy said in the speech made on Sunday to a gathering in Switzerland.

"It has moved from 150 basis points to 100 basis points when times were good and has now moved to 250 basis points, reflecting greater uncertainties," he said, adding market participants must be willing to share some of the costs of the uncertainties.

The speech, at the annual general meeting of the Bank for International Settlements, was posted on the RBI's website www.rbi.org.in.

The RBI has raised the lending rate by 75 basis points so far in 2008, all in June, as annual inflation has accelerated to a 13-year high of 11.42 percent.

It had left the lending rate unchanged for more than a year, preferring to tighten banks' cash reserve requirements as a way to keep inflation in check.

Reddy said the central bank did not treat oil prices entirely as a shock and said: "While undertaking a nuanced approach to managing aggregate demand, recognising the elements of shock and consequent impact on inflation expectations, the underlying demand conditions warranted several interest rate and liquidity measures in recent weeks."