New Delhi, June 10: The finance ministry is believed to have supported plans to increase the overnight lending rate to control money supply and bring down inflation.

The Reserve Bank of India (RBI) will now take a call on increasing the repo rate, which is the rate at which the central bank lends money to banks against approved securities for meeting their day-to-day requirements or to fill their short-term gaps.

This rate could be raised by a quarter per cent and if the hike occured, it would be on top of a three-quarter-per- cent rise announced earlier. The repo rate currently stands at 7.75 per cent.

Banks benchmark their lending and deposit rates to the repo rate and any increase in the rate is bound to trigger a tighter money policy from them. However, it also means that parking money in Indian banks will be more lucrative for many investors.

Costly money is considered the traditional way of battering down prices as it leads to the weakening of demand. India’s inflation has already risen to a four-year high of 8.24 per cent on the back of rising food and commodity prices. Inflation could even be close to double figure once the impact of the fuel price hike announced last week is factored.

Officials said with the rupee falling in value against the dollar because of a pull-out by foreign institutional investors from the Indian bourses, it could help if the repo rate was hiked. The rupee is close to the 43-to-a-dollar mark, losing nine paise today to end at 42.97 to the dollar.

The RBI is expected to announce the monetary policy on July 29, but officials said it would take a call on the repo rate within seven months as it needed to stem inflation fast.

However, industry lobbyists do not support a rate hike as they fear that the cost of borrowing will go up further and, thereby, eat into the profit of firms.

World Bank forecast

Economic growth has already slowed down to 9 per cent for 2007-8 compared with 9.4 per cent and 9.6 per cent in the previous two years, respectively. The economy is expected to grow 8.5 per cent this year, though a World Bank report released today projected growth at a much slower rate of 7 per cent.

The World Bank attributed the moderation in the growth rate of gross domestic product to the “monetary tightening in 2007 (that) led to softening in domestic demand.” Though the restrictive measures prevented a further rise in inflation, they proved detrimental to exporters by strengthening the rupee, the report said.