Reserve Bank of India in order to lower down inflation rate has hiked repo rate by 50 bps and CRR by 25 bps. These are short term measures to curve inflation. Earlier, in last month RBI had hiked repo rate by 50 basis points to 8.5 per cent. Inflation has been a big issue for RBI and government of India in recent months which has been hovering above 12 per cent.

 

YV Reddy’s decision seems to be influenced by priority to price stability, anchoring inflation expectations and orderly conditions in financial markets. These steps accordingly will be able to maintain the growth momentum. According to some financial expert the move to raise repo rate will reduce demand.

 

Also, according to some experts this could reduce jobs in market and will lead to lower tax and excise revenue, and will put pressure on fiscal deficit. Accordingly, CRR hike may lead to reversal in capital flows into shares leading to cash conditions tightening drastically. And, it might will reduce inflation-stoking money supply and bring down price pressures.