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The Reserve Bank of India on Thursday raised its key short-term lending rate by 25 basis points and borrowing rate by 50 basis points to check rising prices. "Inflation remains the dominant concern in macroeconomic management", RBI said in statement, while raising the repo (lending) and reverse repo (borrowing) rates to six per cent and five per cent, respectively. The new rates, which come into effect immediately, were announced as part of the first scheduled mid-quarterly review of the monetary policy. The hike in rates will lead to a rise in cost of funds for the banks and eventually makes loans expensive, which will reduce consumption. While inflation for August was 8.5 per cent (as per the new series with 2004-05 as Base Year), food inflation was at a high of 15.10 per cent for the week ended September 4. To check inflation, the RBI had raised these key rates by an identical margin in July. Business chambers in the country have expressed fear that the rising interest rates would hit business and borrowing capacity from banks. The RBI, however, said that its major concern is inflation, and added that there is a need for "continued policy response" to contain it.

RBI raises key rates to tame inflation