In a move to contain persisting inflationary pressure, the Reserve Bank of India (RBI) on Friday hiked the indicative short-term policy rate (repo rate) by 25 basis points from 8 per cent to 8.25 per cent with immediate effect.

Consequently, the reverse repo rate will stand automatically adjusted to 7.25 per cent and the marginal standing facility (MSF) rate to 9.25 per cent.

Repo rate is the rate at which banks borrow from the central bank and reverse repo is the rate at which banks park their funds with the RBI.

“With the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk. This makes it imperative to persevere with the current anti-inflationary stance,” said RBI while increasing the rates. The central bank raised rates for the 12th time since March 2010.

Even as many indicators point to moderating growth, both headline and non-food manufactured products inflation were at uncomfortably high levels, said RBI, adding, “Crude oil prices remain high. Food price inflation persists notwithstanding a normal monsoon”.

Headline year-on-year wholesale price index (WPI) inflation rose from 9.2 per cent in July to 9.8 per cent in August 2011. Inflation in respect of primary articles and fuel groups edged up in August. Year-on-year non-food manufactured products inflation rose from 7.5 per cent in July to 7.7 per cent in August 2011 suggesting as yet persistent demand pressures.

“The oil marketing companies raised the price of petrol by Rs.3.14 a litre with effect from September 16. This will have a direct impact of 7 basis points to WPI inflation, in addition to indirect impact with a lag,” the RBI said.

However, the central bank said that inflationary pressures were expected to ease towards the later part of 2011-12. “Stabilisation of energy prices and moderating domestic demand should facilitate this process”.

After slight moderation in July, non-food manufactured products inflation rose again in August, suggesting continuing demand pressures. Global crude oil prices have remained elevated despite weakening of global recovery. Moreover, “there is still an element of suppressed inflation. Though, global oil prices have moderated, the pass-through to domestic prices remains incomplete.” Also, current administered electricity prices are yet to reflect increase in input prices, even as many states have initiated increases.

Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon. The inflation momentum, reflected in the de-seasonalised sequential monthly data, persists.

GDP growth decelerated to 7.7 per cent in the first quarter of 2011-12 from 7.8 per cent in the previous quarter and 8.8 per cent in the corresponding quarter a year ago. Agricultural growth has accelerated, but industry and services have decelerated. The index of industrial production (IIP) slowed from 8.8 per cent year-on-year in June to 3.3 per cent in July.

However, excluding capital goods, the growth of IIP was higher at 6.7 per cent in July compared with 4.4 per cent in June. Cumulatively, the IIP increased by 5.8 per cent during April-July 2011, compared with an increase of 9.7 per cent in the corresponding period of the previous year.

Monsoon rains so far have been normal. The first advance estimates for the 2011-12 kharif season point to a record production of rice, oilseeds and cotton, while the output of pulses may decline.