RBI hikes repo and reverse repo rates by 25 bps

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Reserve Bank of India on Friday raised its key short-term interest rates by 25 basis points each, citing worries over inflation, nearly a month ahead of its next scheduled review.

Wholesale price index (WPI) inflation rose to 10.2 percent in May, from 9.6 percent in April, exceeding expectations. The Reserve Bank of India raised its main lending rate, or repo rate, to 5.50 percent from 5.25 percent, and the reverse repo rate, at which it absorbs excess cash from the banking system, to 4 percent, from 3.75 percent, it said in a statement.

"There has been some moderation in food price inflation, but the price index of food articles continues to increase," the central bank said. "More importantly, the prices of non-food manufactured goods and fuel items have accelerated in recent months," it said.

The rate hike comes soon after the Indian government raised fuel prices that it said would lift inflation by nearly one percentage point.

The central bank said that while inflation and GDP growth data had been available by mid-June, it had been inadvisable to raise policy rates then as the financial system was dealing with liquidity pressures resulting from higher than expected payments for wireless spectrum in government auctions.

"It's a welcome move but probably RBI should have moved a little more aggressively -- not now, but earlier in April or May," said Jay Shankar, economist at Religare capital. "The rate hike quantum is okay as we have a liquidity crunch scene right now. But it has come too late," he said.