Highlights - RBI raises repo rate, cuts MSF

Don't want to miss the best from Business Standard?

REUTERS - The Reserve Bank of India (RBI) raised its policy interest rate for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated for the rest of the fiscal year, and rolled back an emergency measure put in place to support the slumping rupee.

The central bank lifted its policy repo rate by 25 basis points (bps) to 7.75 percent, in line with the expectations of most analysts in a recent Reuters poll, despite the risks to an economy beset by sluggish growth.

Following are the highlights of the central bank's second quarter review of the Annual Monetary Policy Statement for 2013/14:

POLICY MEASURES

* Repo rate hiked by 25 bps to 7.75 pct

* Reverse repo rate rises to 6.75 pct

* Banks' cash reserve ratio unchanged at 4 pct

* Marginal Standing Facility Rate (MSF) cut by 25 bps to 8.75 pct

* Increases cash provided to banks through term repo to 0.50 pct of net demand and time liability from 0.25 pct

POLICY STANCE

* WPI inflation to remain higher than current levels, warranting "appropriate policy response"

* Important to break the spiral of rising price pressures in order to curb the erosion of financial saving

* Process of realigning interest rate corridor to normal monetary policy operation now complete

* Will closely monitor inflation risks while being mindful of the evolving growth dynamics

FORECASTS

* India's GDP growth at 5 percent for 2013/14

* Retail inflation likely to remain around or even above 9 percent without policy action

MEASURES FOR BANKS, NON-BANK FINANCIAL COMPANIES

* Foreign banks setting up wholly-owned subsidiaries will be given near-national treatment, to issue scheme by mid-Nov

* Initial minimum paid-up voting equity capital or net worth for wholly owned foreign bank's subsidiary will be $5 billion

* More durable way for banks to mitigate mismatch in demand and supply of cash is to step up efforts to mobilise deposits

* Draft report on Basel III capital framework likely by end-November

* Draft of proposed framework for domestic systemically important banks by end-November

* To issue updated guidelines on stress testing for banks by end-November

* To give banks option to pay interest on savings deposits and term deposits at intervals shorter than quarterly intervals

* First meeting of High Level Advisory Committee on new bank licences on November 1

* To issue guidelines on restructuring for non-bank finance companies (NBFCs) by end-November

MEASURES FOR MARKETS, LIQUIDITY

* To issue 10-year retail inflation-indexed securities in November/December

* To launch 10-year interest rate futures contracts by end-December

* Allows partial credit enhancement for corporate bonds by banks via credit, liquidity facilities

* To issue final guidelines on unhedged foreign currency exposures by end-December

* To revise timings for conducting MSF operations from November 5 between 1330 GMT and 1400 GMT

* To close special repo window for mutual funds with immediate effect

The India Online special page on the RBI policy review is live at http://in.reuters.com/subjects/rbi-policy-review

(Compiled by Neha Dasgupta)