RBI hikes repo rate, leaves other rates unchanged

Repo Rate – Increased to 7.25% from 7% Reverse Repo Rate – Unchanged at 6%
Bank Rate – Unchanged at 6.0 % Cash Reserve Ratio – Unchanged at 5 %

In a deft balancing act, the Reserve Bank of India increased the repo rate by 25bps to 7.25 percent, while leaving the reverse repo rate unchanged at 6 percent. Reverse repo rate and repo rate act as the floor and the ceiling providing a ‘corridor’ for the money market. Reverse repo rate is the overnight rate at which the central bank sucks out excess liquidity by selling securities in the market and repo rate is the rate at which it injects liquidity into the system by buying securities. Normally, a 100 bps spread is maintained between the two rates rates, but it has now been increased to 125 bbp. Bank Rate and CRR have also been left unchanged.

The announcement made in the mid-term review of the Annual Policy Statement for FY'07 came as a surprise for the market. Market was expecting a hike in reverse repo rate as well, in view of the pressure on inflation from a strong economic growth. Maintaining optimism about the economic growth, RBI has upped the GDP growth projection for 2006-07 to 8 percent from the earlier 7.5-8 percent. The central bank also maintains the year end (March 2007) inflation target at 5-5.50. Inflation reading for the week ended October 14 stood at 5.26%.