Belying expectations of another pause in the rate hiking cycle, the RBI today decided to increase the policy repo rate under the liquidity adjustment facility by 25 basis points from 7.75 per cent to 8.0 per cent . Consequently, reverse repo rate will now be at 7 per cent. There is no change in CRR at 4 per cent.

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The RBI has maintained that although CPI inflation was coming down, it is still at elevated levels at close to double digits. It also said that core inflation ( non food and fuel) remained high, indicative of wage inflation and second order impact.

It said, “Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and decline in inventories of raw materials and finished goods in relation to sales suggest that aggregate demand pressures are still imparting an upside to overall inflation. It is critical to address these risks to the inflation outlook resolutely in order to stabilise and anchor inflation expectations, even while recognising the economy is weak and substantial fiscal tightening is likely in Q4.”

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Inflation may cross 8%

The RBI noted that the Dr Urjit Patel committee has indicated a “glide path” for disinflation that sets an objective of below 8 per cent CPI inflation by January 2015 and below 6 per cent CPI inflation by January 2016. The Reserve Bank’s baseline projections indicate that over the ensuing 12-month horizon, and with the current policy stance, there are upside risks to the central forecast of 8 per cent.

Justifying its hike in repo rate, the central bank said, “An increase in the policy rate will not only be consistent with the guidance given in the Mid-Quarter Review but also will set the economy securely on the recommended disinflationary path.”

Policy review once in 2 months

It added that further policy tightening in the near term is not anticipated at this juncture.

It projected GDP for the current fiscal at a little below 5 per cent while it expected it to be between 5 per cent and 6 per cent in the next fiscal.

Raghuram Rajan, Governor, RBI, said in a statement today, “The slowdown in the economy is getting increasingly worrisome. Our current assessment is that growth is likely to lose momentum in Q3 of 2013-14, with industrial activity in contractionary mode, mainly on account of manufacturing. Lead indicators of services also suggest a subdued outlook, barring some pick-up in transport and communication activity. On the other hand, agricultural performance has so far been robust, and the strong pick-up in rabi sowing indicates that this should be sustained.”

The RBI has decided to have a policy review once in 2 months ( 6 reviews in a year), instead of once in 45 days.

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(This article was published on January 28, 2014)
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