Reserve Bank of India Hikes Rate 25bps to 8.50%

The Reserve Bank of India [RBI] raised its repo rate by 25 basis points to 8.50% from 8.25% and raised the reverse repo rate to 7.50% from 7.25%.  The RBI said: "both inflation and inflation expectations remain high. Inflation is broad-based, and is above the comfort level of the Reserve Bank. We expect these levels to persist for two more months. There are potential risks of expectations becoming unhinged in the event of a pre-mature change in the policy stance. However, reassuringly, momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures, indicate moderation. This is consistent with the projection that inflation will decline beginning December 2011."

The Reserve Bank of India also increased the repo rate by 25 basis points at its previous meeting, after hiking a surprise 50 basis points at its previous meeting to 8.00%, having increased 25 basis points in June, and 50 basis points during the May meeting.  India's key inflation measure, the wholesale price index, increased 9.72% in September, compared to 9.78% in August, 9.22% in July, 9.44% in June, 9.06% in May, 8.66% in April, and 8.98% year on year in March, exceeding the Bank's previous estimate of 8%.  

India reported annual GDP growth of 7.7% in the June quarter, compared to 7.8% in the March quarter this year, and 8.3% in the previous quarter.  The RBI revised its growth projections down for 2011-12 to 7.6 percent from 8.0 percent previously, due to downside risks.  The Indian Rupee (INR) has depreciated about 11.5% against the US dollar so far this year, while the USDINR exchange rate last traded around 49.69

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