RBI raise repo rate by 25 bps to 7.5%

RBI begins the process of cautious unwinding of the exceptional measures

The Reserve Bank of India (RBI) has released the Mid-Quarter Review of Monetary Policy. Key highlights of the policy are:

* Increased the policy repo rate by 25 bps to 7.5% with immediate effect.

* Reduced the marginal standing facility (MSF) rate by 75 bps from 10.25% to 9.5% with immediate effect.

* Reduced minimum daily maintenance of the cash reserve ratio (CRR) from 99% of the requirement to 95%.

* CRR unchanged at 4.0%.

RBI Assessment

* Decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable.

* Domestic growth has weakened with continuing sluggishness in industrial activity and services.

* Consumption is starting to weaken even in rural areas, growth is trailing below potential and the output gap is widening.

* Some pick-up is expected on account of the brightening prospects for agriculture due to kharif output and the upturn in exports.

* In the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year.

* Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency.

* Focus has turned to internal determinants of the value of the rupee, primarily the fiscal deficit and domestic inflation.

* As the external environment has improved, it is now possible for the Reserve Bank to contemplate easing exceptional measures in a calibrated manner.

Policy Rationale

* As the measures are unwound, the objective is to normalize the conduct and operations of monetary policy.

* 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 LAF repo rate by 25 basis points immediately.

* Policy stance and measures set out in this review begins the process of cautious unwinding of the exceptional measures.

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