Tuesday, January 25, 2011

Food inflation to spill over, says RBI, hikes rates

With rising prices becoming the “dominant concern”, the Reserve Bank of India on Tuesday hiked its key short-term rates by 25 basis points and cautioned that food inflation has remained at an “elevated level for about two years and the prospect of it spilling over to the general inflation process is rapidly becoming a reality”.

Though the latest RBI measures will push up the cost of funds, bankers are not expecting an immediate hike in lending rates. Putting upward pressure on borrowing and lending rates, the RBI raised its repo rate—at which it lends to banks—to 6.5 per cent from 6.25 per cent and lifted its reverse repo rate—at which it borrows from banks—to 5.5 per cent from 5.25 per cent.

Though the latest RBI measures will push up the cost of funds, bankers are not expecting an immediate hike in lending rates.

Putting upward pressure on borrowing and lending rates, the RBI raised its repo rate—at which it lends to banks—to 6.5 per cent from 6.25 per cent and lifted its reverse repo rate—at which it borrows from banks—to 5.5 per cent from 5.25 per cent. “Even as the rate itself remains unacceptably high, the reversal in the direction of inflation is striking. Primary food articles inflation has risen again sharply. Non-food articles inflation and fuel inflation are already at elevated levels. Non-food manufacturing inflation has remained sticky. There are signs of food and fuel price increases spilling over into generalised inflation,” RBI Governor D Subbarao said.

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