Reuters | Tue Apr 20, 2010 | 3:04pm IST
The Reserve Bank of India (RBI) on Tuesday raised key interest rates by 25 basis points, as expected, to battle near double-digit inflation, signaling gradual tightening ahead to sustain growth and manage record government borrowing. The Reserve Bank of India’s measured steps, which included raising the cash reserve ratio (CRR) requirement for banks by 25 basis points, increased the likelihood of another rate rise before its next quarterly review in July, some watchers said. The yield on the 10-year benchmark bond traded at 8.01 percent, down 7 basis points on the day, after easing to 7.98 percent after the RBI announcement, its lowest since April 13, as some players had bet on a bigger 50 basis point rise. The main 30-share BSE index was up 0.4 percent.
"The policy statement is not hawkish enough to address the concerns on the inflation front," said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai. Price pressures are spreading beyond food to costs of fuel and manufactured goods such as cars. March inflation reached 9.9 percent year-on-year, its fastest pace in 17 months. However, the RBI is under pressure from the government not to raise rates aggressively, with New Delhi worried it could dent economic growth and also complicate its borrowing, which will reach a record $100 billion in the current fiscal year. "RBI at this juncture is more constrained by the management of the government’s record borrowing programme," Nitsure said.
The RBI is expected to raise rates by a further 100 basis points over the next 12 months, according to the one-year overnight indexed swap (OIS) rate at 4.95 percent. That is in line with a Reuters poll ahead of Tuesday’s review, which forecast 100 basis points of tightening by the end of 2010. "The next scheduled