June 24, 2008 / 3:19 PM / 10 years ago

RBI raises lending rate, CRR by 50 bps each

MUMBAI (Reuters) - The Reserve Bank of India (RBI) raised its key lending rate on Tuesday to its highest in six years and increased the ratio of deposits banks should keep with it by 50 basis points to fight inflation, now above 11 percent.

This is the second increase in the lending rate, known as the repo rate, this month. It rises 50 basis points to 8.5 percent with immediate effect.

The cash reserve ratio (CRR), the ratio of deposits, increases to 8.75 percent from 8.25 percent and the rise will take effect in two 25-basis-point stages on July 5 and July 19.

“At this juncture, the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations,” the central bank said in a statement.

Wholesale price inflation, India’s most widely watched price measure, accelerated to a 13-year high of 11.05 percent in early June, the first inflation reading after the government increased state-set fuel prices at the start of the month.

In the previous week the rate had been 8.75 percent and has doubled since February, largely on costlier oil, metals and food.

The central bank had been expected to make an unscheduled policy move after the finance ministry said at the weekend monetary policy should be the first line of defence to manage demand in Asia’s third-largest economy.

But the extent of the tightening may be a surprise to markets after central bank governor Yaga Venugopal Reddy seemed to suggest a more gradual move in a statement on Monday.

The next policy review is on July 29.

“Monetary policy has to urgently address aggregate demand pressures which appear to be strongly in evidence,” the RBI statement said on Tuesday.

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