RBI has decided to increase the repo rate under the liquidity adjustment facility (LAF) by 25 basis points. The repo rate will accordingly move up from 8.25 to 8.5 per cent.Accordingly, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, gets calibrated to 7.5 per cent.

RBI has also decided to deregulate the savings bank deposit interest rate with immediate effect.

Read more about some basic economic terms.

Considerations Behind the Policy Move (Link)

The decision to persist with monetary tightening has been informed by two broad considerations.First, 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 second consideration that shaped the policy decision is that growth is clearly moderating on account of the cumulative impact of past monetary policy actions as well as some other factors. As inflation begins to decline, there will be growing room for the policy stance to give due consideration to growth risks, within the overall objective of maintaining a low and stable inflation environment.

While the impact of past monetary actions is still unfolding, based on our growth-inflation dynamics, we considered it necessary to persist with the anti-inflationary stance.

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