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Increase in policy rates a necessary step to tame inflation: Pranab Mukherjee

May 3, 2011 - New Delhi

Union Finance Minister Pranab Mukherjee on Tuesday said the sharp increase in repo rate and reverse repo rate by 50 basis points was a necessary step to tame inflation.

"RBI Governor came and I had a discussion with him. It was agreed upon that there should be a 50 basis points increase both in repo rate and reverse repo rate because the corridor of one percent we are maintaining. This was necessary to contain inflation, inflationary pressure in the economy is still working very high," Mukherjee told reporters here.

The Reserve Bank of India (RBI) earlier today raised repo and reverse repo rates by 50 basis points each for the current fiscal.

The RBI has also increased the saving bank rate by 50 basis points to four per cent to give higher returns to depositors in the wake of high inflation.

While the repo rate has been raised from 6.75 per cent to 7.25 per cent, the reverse repo rate has been raised to 6.25 per cent. However, the RBI has kept the Cash Reserve Ratio (CRR) unchanged at six per cent. Savings bank deposit interest rate was increased from 3.5 per cent to four per cent.

Under a new arrangement, the repo rate becomes the central bank's only independently varying policy rate, and the reverse repo rate, at which the RBI absorbs excess liquidity, will be pegged 100 basis points below the repo rate.

Mukherjee said the figures of Wholesale Price Index (WPI) in July 2010, which was around 10 percent, came down to 8.1 percent in November, but again started behaving erratically and moved to 9 percent in March 2011.

The RBI said high prices of oil and other commodities and the cumulative impact of its policy measures will lead to moderating growth of about eight percent for the current fiscal year.

Announcing these measures, RBI Governor D Subbarao said: "RBIs baseline inflation projections are that inflation will remain elevated, close to the March, 11 level (8.98 percent) over the first half of FY12 before declining."


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