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May 03, 2011 at 12:13pm IST

RBI hikes repo, savings bank interest rates

Mumbai: The Reserve Bank of India (RBI) on Monday raised the repo (rate at which it lends to banks) and the reverse repo (rate at which it borrows) rates by 50 basis points to 7.25 per cent and 6.25 per cent. RBI Governor D Subbarao in his credit policy announcement on Tuesday, said resurgence of inflation remains a concern while announcing the increase in repo rate.

The central bank in its annual policy on Tuesday said that over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty.

"Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, should take precedence," Subbarao said.

Savings bank interest rate has also been increased to 4 per cent from 3.5 per cent now. The RBI has maintained cash reserve ratio at 6 per cent.

Banks have already indicated they would be forced to revise rates if the RBI does hike key policy rates. So after Tuesday's announcement by the RBI, home loans could become dearer.

The RBI also lowered the projected economic growth to 8 per cent during 2011-12 compared to 9 per cent estimated by the Finance Ministry.

The policy aims at maintaining an interest rate environment that moderates inflation and anchors inflation expectations. Second, it targets to foster an environment of price stability that is conducive to sustaining growth in the medium-term, coupled with financial stability.

And, thirdly, to manage liquidity to ensure that it remains broadly in balance, with neither a large surplus-diluting monetary transmission nor a large deficit choking off fund flows.

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