RBI raises repo rate by 25 bps

RBI raises repo rate by 25 bps

Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday reiterated his aggressive stance on repo rate in the third quarterly review of monetary policy by going for 25 basis points hike. He, however, said another hike in the repo rate anytime soon was unlikely.

The move to fix the lending rate at 8 per cent predictably caught the market off guard, but reflected the RBI’s much anticipated shift towards a consumer price index (CPI)-based monetary policy in keeping with recent recommendations of the Urjit Patel Committee.

With this, the central bank hiked the repo rate for the third time. There has been an increase of 75 bps in repo rate since Rajan took charge of the RBI in September last year.

Core inflation remains a concern despite the CPI easing to a three-month low of 9.87 per cent and Wholesale Price Index inflation falling to a five-month low of 6.16 per cent in December.

The reverse repo rate or the rate at which banks park their surplus funds with the RBI, now stands adjusted at 7 per cent and marginal standing facility and bank rates at 9 per cent. Cash Reserve Ratio (the amount banks are required to keep with the RBI) has been left unchanged at 4 per cent.

Though the extent and direction of further policy steps were said to be data dependent, Rajan promised a pause in the RBI’s tightening stance if the disinflationary process evolved according to its baseline projection.

The Patel panel had set an objective to bring down the CPI below 8 per cent by January 2015 and 6 per cent by January 2016.

During the mid-quarter policy review in December, Rajan decided to hold rates as he wanted to wait for more data and also expected the inflation to soften on the back of falling vegetable prices.

Yet, Rajan went for a rate hike despite the inflation softening in December. The RBI justified its action saying that the CPI inflation was in double digits, not to mention an uptick in non-food manufacturing inflation.

However, the RBI pointed out that the silver lining was the external sector. For the first time in three years, current account deficit was expected to fall below its comfort zone of 3 per cent. It predicted that the deficit would narrow down to 2.5 per cent of the GDP for 2013-14 as against a record high of 4.8 per cent in the previous fiscal.  The RBI expects growth for 2014-15 to be around 5.5 per cent as against 5 per cent in the current fiscal.

Liked the story?

  • 0

    Happy
  • 0

    Amused
  • 0

    Sad
  • 0

    Frustrated
  • 0

    Angry