RBI raises short-term rate 25 bps to 5.0 pct to curb inflation

The Reserve Bank of India (RBI) lifted its benchmark interest rate by 25 basis points to 5.0 percent on Thursday to control rising inflation in Asia's fourth-largest economy, surprising markets which had expected steady policy.

However, the central bank left the bank rate -- used to price medium and long term loans -- unchanged at 6 percent, the lowest it has been in three decades.

"The overall stance ... will continue to be ... provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability," the RBI said in a statement.

"If oil prices continue to firm up at a pace seen so far in 2005, financial markets could see a major reaction as pace of economic activity slackens, corporate earnings fall and external imbalances sharpen."

The yield on the most actively traded 12-year government bond rose 16 basis points to 7.5980 percent after the announcement, while the rupee held steady at 43.7100/7175 per dollar.

The central bank's move was its second successive rate rise. It lifted the reverse repo rate by 25 basis points from a four-decade low of 4.5 percent last October, the first rise in four years.

Analysts had expected rates to be kept steady to underpin growth and see how crucial monsoon rains pan out from June. The October rate rise was also not forecast by markets.

In its yearly policy statement, the central bank forecast India's gross domestic product would expand by 7.0 percent in the fiscal year ending on March 31, 2006, and estimated annual inflation at 5.0-5.5 percent by the end of the financial year.

The inflation estimate was lower than market expectations of 5.5-6.0 percent.

"The inflation rate in 2005/06, on a point-to-point basis, may be placed in a range of 5.0-5.5 percent subject to the growing uncertainties on the oil front both in regard to global prices and their domestic absorption," the bank said.

Inflation based on wholesale prices is running at 5.5 percent, having edged up from about 5 percent in February, while growth is estimated at 6.9 percent for 2004/05.

One keeps reading abt how information must turn to knowledge and knowledge must turn to wisdom. While I appreciate the write-up on the whole, in this context, I would mention the para above and wish most of the other paras were expressed similary- in terms of the effect on the good old mkt.