 "Hawkish Rajan bites the bullet, raises repo by 25 bps")
RBI's new governor Raghuram Rajan today bit the bullet by hiking the repo rate by 25 basis points to 7.5%. Economists had widely expected the RBI to leave the repo rate unchanged.
The central bank, however, reduced the Marginal Standing Facility (MSF) rate by 75 basis points to 9.5%.
The reverse repo rate stands adjusted at 6.5%.
RBI also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99% of the requirement to 95% effective from the fortnight beginning September 21, while keeping the CRR unchanged at 4%.
Rajan said that RBI will lower its MSF rate by more than any hike it makes in the policy repo rate in order to reduce the gap between them to 100 basis points.
He added that the hike in the key policy repo rate cannot be immediately viewed as negative for growth.
The repo rate hike affects 0.5% of the entire borrowing of the banking system, he said.
"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand. Keeping all this in view, bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Rajan said in the mid-quarter policy review statement.
Driven by costlier food items, wholesale price inflation rose to a six-month high of 6.1% in August.
He also said he wanted the repo rate to resume its place as the operational policy rate as the rupee support measures are unwound.
The central bank said it is now possible to contemplate easing exceptional cash tightening measures in a calibrated manner.
Rajan said he was confident that the current account deficit could be financed this year without suffering a substantial drawdown in foreign exchange reserves.
He added that he does not anticipate a new set of rupee stabilising measures since the US Fed had decided to postpone tapering its bond buying program.
The RBI would slowly taper-off the special foreign exchange swap window instituted for oil marketing companies when economic conditions improve.
The central bank, however, reduced the Marginal Standing Facility (MSF) rate by 75 basis points to 9.5%.
The reverse repo rate stands adjusted at 6.5%.
RBI also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99% of the requirement to 95% effective from the fortnight beginning September 21, while keeping the CRR unchanged at 4%.
Rajan said that RBI will lower its MSF rate by more than any hike it makes in the policy repo rate in order to reduce the gap between them to 100 basis points.
He added that the hike in the key policy repo rate cannot be immediately viewed as negative for growth.
The repo rate hike affects 0.5% of the entire borrowing of the banking system, he said.
"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand. Keeping all this in view, bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Rajan said in the mid-quarter policy review statement.
ALSO READ: Inflation may be higher than projected: RBI
Driven by costlier food items, wholesale price inflation rose to a six-month high of 6.1% in August.
He also said he wanted the repo rate to resume its place as the operational policy rate as the rupee support measures are unwound.
The central bank said it is now possible to contemplate easing exceptional cash tightening measures in a calibrated manner.
Rajan said he was confident that the current account deficit could be financed this year without suffering a substantial drawdown in foreign exchange reserves.
He added that he does not anticipate a new set of rupee stabilising measures since the US Fed had decided to postpone tapering its bond buying program.
The RBI would slowly taper-off the special foreign exchange swap window instituted for oil marketing companies when economic conditions improve.
You’ve reached your limit of {{free_limit}} free articles this month.
Subscribe now for unlimited access.
Already subscribed? Log in
Subscribe to read the full story →*Subscribe to Business Standard digital and get complimentary access to The New York Times
Smart Quarterly
₹900
3 Months
₹300/Month
SAVE 25%
Smart Essential
₹2,700
1 Year
₹225/Month
SAVE 46%
*Complimentary New York Times access for the 2nd year will be given after 12 months
Super Saver
₹3,900
2 Years
₹162/Month
Subscribe
Renews automatically, cancel anytime
Here’s what’s included in our digital subscription plans
Exclusive premium stories online
Over 30 premium stories daily, handpicked by our editors
Complimentary Access to The New York Times
News, Games, Cooking, Audio, Wirecutter & The Athletic
Business Standard Epaper
Digital replica of our daily newspaper — with options to read, save, and share
Curated Newsletters
Insights on markets, finance, politics, tech, and more delivered to your inbox
Market Analysis & Investment Insights
In-depth market analysis & insights with access to The Smart Investor
Archives
Repository of articles and publications dating back to 1997
Ad-free Reading
Uninterrupted reading experience with no advertisements
Seamless Access Across All Devices
Access Business Standard across devices — mobile, tablet, or PC, via web or app
SAVE 25%