India's central bank unleashed a fresh round of monetary tightening Tuesday, raising its key short-term lending rate by half-a-percentage point after inflation hit a 13-year high of over 11 percent. The Reserve Bank of India raised its repo rate at which commercial banks borrow funds from the central bank to 8.5 percent from 8.0 percent effective immediately.
It also announced a two-stage hike of the Cash Reserve Ratio, or the amount of cash banks must hold in reserve, by 25 basis points to 8.50 percent effective July 5, and by another 25 basis points to 8.75 percent on July 19. The RBI kept its key short-term borrowing rate, or the reverse repo rate, unchanged at six percent.
"Monetary policy has to urgently address aggregate demand pressures, which appear to be strongly in evidence," the central bank said in a statement. Inflation in Asia's third-largest economy rose to a 13-year high of 11.05 percent in the week ended June 7, well above the RBI's declared comfort level of 5.5 percent.
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