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High oil prices reduce scope for easing interest rate: RBI

Publish Date 2011-09-29
With international oil prices continuing to remain high, the Reserve Bank may not have much scope to reduce interest rates in its forthcoming mid-year monetary policy review next month.

"Oil prices have remained very steady despite global economic concerns while in 2008 (when recession hit the global economy) they declined sharply in a small period. It reduces space that monetary policy has in dealing with the situation," RBI Deputy Governor Subir Gokarn told reporters here.

The RBI, which has raised key interest rates 12 times since March 2010 to contain inflation, is scheduled to announce mid-year monetary policy review on October 25.

International oil prices have remained persistently high.

Brent Crude oil was trading at over USD 107 a barrel despite fears of double-dip recession hitting global economy.

Gokarn's statement comes within days of RBI Governor D Subbarao defending the tight monetary stance of the central bank to check inflation, which has remained near the double-digit mark despite series of interest hikes.

While the short-term borrowing (repo) rate has gone up by 3.5% since March 2010, inflation has remained stubbornly high at near 10%, much above the Reserve Bank's comfort level of 4-5%.

In addition to other factors, rising crude oil prices and rupee depreciation have been fueling inflation at home. The oil marketing companies has revised upwards price of petrol twice in the last six months.

Subbarao, while speaking at a function in New York, has said, "at this high level, inflation is unambiguously inimical to growth; it saps investor confidence and erodes medium term growth prospects."

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