TV9 News: RBI Raises Repo Rate By 25 bps

TV9 News: RBI Raises Repo Rate By 25 bps..., Follow us on : YOUTUBE : http://www.youtube.com/user/tv9kannadanews FACEBOOK : https://www.facebook.com/Tv9Karnatakanews TWITTER : https://twitter.com/tv9kannada PINTEREST : http://pinterest.com/tv9karnataka Raghuram Rajan, in his first monetary policy, has increased repo rate while reducing MSF or borrowing rate for banks by 0.75% The Reserve Bank of India (RBI), in its mid-quarter credit policy review has reduced marginal standing facility (MSF) rate by 75 basis points (bps) to 9.5% and minimum daily maintenance of the cash reserve ratio (CRR) to 95% of the requirement from 99%. The central bank increased repo rate by 25bps to 7.5% with immediate effect. Consequently reverse repo rate and bank rates are adjusted to 6.5% and 9.5%, respectively. RBI has kept CRR unchanged at 4%. "The policy stance and measures set out in this review begins the process of cautious unwinding of the exceptional measures, which will restore normalcy to financial flows. They are also intended to address inflationary pressures so as to provide a stable nominal anchor for the economy, thereby mitigating exchange market pressures and creating a conducive environment for the revitalisation of sustainable growth," RBI said in a statement. There has been a lot of uncertainty regarding the RBI's operative instruments (repo rate and MSF), its intended objectives (growth/inflation or forex volatility) as well as the policy stance of the new governor. "The new RBI under Dr Raghuram Rajan brings more clarity on the instrument (repo) versus objective (CPI inflation/inflation expectations), in contrast to the stealth tightening route followed thus far. For the economy, interest rates will likely be much higher than assumed thus far, and growth should be weaker in the near-term," said Nomura Financial Advisory and Securities (India) Pvt Ltd in a report. India Ratings & Research said with the repo rate going up, MSF rate coming down and the minimum daily maintenance of CRR declining to 95%, it is mixed bag for the banks so far as their lending rates are concerned. However, the Fitch group company said, it does not expect any cut in the base rate of the banks. On the contrary, in select cases, it might actually go up, the ratings agency added. In a report, Standard Chartered Bank said, "...the unexpected policy rate hike and a strong hawkish bias are likely to dampen market sentiment, in our view. We believe these measures imply two things. First, the 9% appreciation in Indian rupee since the beginning of September, combined with the dovish FOMC, had comforted the RBI on the currency market. Second, with an uptick in WPI inflation, still elevated CPI inflation, and the risk of fiscal slippage, the RBI has shifted focus back to domestic factors. Indeed, the RBI has prepared the market for possible policy actions outside the scheduled policy meetings, if needed." Since mid-July, the central bank has put in place a number of exceptional measures to tighten liquidity with a view to dampening volatility in the foreign exchange market. These measures have raised the effective policy rate for monetary policy operations to 10.25%, aligned to the re-calibrated MSF rate. The intent has been to maintain tight liquidity conditions at the short end of the term structure until the measures designed to alter the path of the current account deficit (CAD) and improve prospects for its stable funding take effect. "As a number of these measures are now in place and because the external environment has improved, it is now possible for the Reserve Bank to contemplate easing these exceptional measures in a calibrated manner. As a first step, therefore, the MSF rate is reduced by 75 basis points. Furthermore, the minimum daily maintenance of the CRR prescribed by the Reserve Bank is brought down from 99% of the requirement to 95%. The timing and direction of further actions on exceptional measures will be contingent upon exchange market stability, and can be two-way. Further actions need not be announced only on policy dates. However, any further change in the minimum daily maintenance of the CRR is not contemplated," RBI said. While appreciating the RBI's concern on inflation, industry body Confederation of Indian Industries (CII) said, this (inflation) is a supply side led issue and therefore, at this point of time, growth should have found priority for the central bank. "Industry would have liked reduction in headline rates. The reduction in MSF by 75 bps is encouraging as this is working as the short term interest rate. However, the increase in repo rate could have been avoided as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation," said, Chandrajit Banerjee, director general, CII.

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