RBI hikes repo rate by 0.25 percent; cuts rupee support

The Reserve Bank of India (RBI) Tuesday hiked a key policy interest rate by 0.25 percent in less than two months that would make home, auto and other loans costlier and eased the rupee support measures.

In its second quarter review of the monetary policy for 2013-14, the RBI hiked repo rate by 25 basis points or 0.25 percent to 7.75 percent. Repurchase or repo rate is the rate of interest that banks pay when they borrow money from the central bank to meet their short-term fund requirement.

This is the second increase in the policy rate in less than two months. The central bank had also hiked the repo rate by 0.25 percent in its previous review announced Sep 20.

Taking cues from the stability in the currency markets, the RBI rolled back some of the measures put in place to support rupee. The Marginal Standing Facility (MSF) rate is reduced by 0.25 percent to 8.75 percent. The move will ease liquidity in the banking system. MSF is a window for banks to borrow from the RBI.

"With the reduction of the MSF rate and the increase in the repo rate in this review, the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete," RBI Governor Raghuram G. Rajan said in the policy statement.

The RBI generally maintained a 100 basis points gap between repo and MSF rate. But this gap was altered recently to support the battered rupee. With the changes now the gap is back to the usual 100 basis points.

Rajan said the policy stance and measures in the review were intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.

"These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics," he said.