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RBI Ups Lending...

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Key Points:
- The reverse repo rate, used to absorb excess cash from banks, was left unchanged at 6.0 per cent.
- The cash reserve ratio was raised by 25 basis points to 9.0 per cent with effect from 30 August.
- The bank rate, used to price medium- and long-term loans, was left unchanged at 6.0 per cent.
Comments:

A tough dose of rates indeed, pointing towards continued heightened concerns on inflation going forward. All efforts to bring inflation to single digit levels. Ready to give up some more growth. Growth forecasts need to be reviewed again.
-- Shubhada Rao, Chief Economist, Yes Bank, Mumbai

That there would be a tightening of monetary conditions, which was likely to include both repo and CRR, was expected. However, the magnitude of the repo rate hike and the fact that both instruments have been used is something the market did not appear to have expected. The main issue in 2008/09 is inflation and excessive focus on growth is misplaced.
--Saumitra Chaudhuri, a member of Prime Minister's Economic Advisory Council, New Delhi
Market Reaction:

- Indian federal bonds yields rose sharply and the rupee strengthened after a news channel reported that the central bank raised rates.
- The 10-year bond yield was at 9.51 per cent at 0625 GMT, 28 basis points higher than before the report, which came ahead of the official announcement from the central bank.
- The partially convertible rupee was at 42.57/58 per dollar, stronger than 42.60/61 before the report. It ended at 42.55/56 rupees to a dollar on Monday.

- The 30-share BSE index extended losses on the day to more than 3 per cent, while the bank index fell 4.5 per cent after the report.

Background:

- India's wholesale price index rose 11.89 per cent in the 12 months to 12 July, a shade down from the previous week's reading of 11.91 per cent which was the highest since the current series became available in 1995.
- The RBI raised the repo rate by 75 basis points in two steps in June, when it also increased the CRR by 50 basis points.
(Reuters)


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