As widely expected, in its second quarter monetary policy review the Reserve Bank of India raised its key rate (repo) to anchor inflationary expectations but cut the marginal standing facility (MSF) to infuse liquidity into the banking system.

The central bank also dropped ample hints that it is not done with monetary tightening yet. With Tuesday’s hike, the repo rate (at which the RBI provides short-term funds to banks) now stands at 7.75 per cent, up from 7.50 per cent and the MSF rate at 8.75 per cent, down from 9 per cent.

Perhaps surprised by the RBI not hiking the repo rate by 50 bps, as feared, the stock market surged with the BSE Sensex gaining 359 points to close the day at 20,929.

The central bank announced another liquidity enhancing measure — banks can now draw liquidity up to 0.50 per cent (earlier 0.25 per cent) of their deposits through repos of seven and 14-day tenors.

Rajan said the repo rate hike aims to break the spiral of rising price pressures as also to curb the erosion of financial savings and strengthen growth. He had last hiked the repo rate in mid-September to 7.50 per cent from 7.25 per cent. “Our intention was to curb inflation in an environment of weakening growth,” said the RBI Governor, Raghuram Rajan.

However, in a statement, the RBI said food price pressures may ease with the arrival of the kharif harvest and the usual seasonal moderation.

Overall, wholesale price index-based inflation is expected to remain higher than the current levels through most of the remaining part of the year, warranting an “appropriate response”.

Driven by a rebound in food and fuel prices, the WPI-based inflation rose in September for the fourth successive month to 6.5 per cent (provisional).

Notwithstanding the expected edging down of food inflation, retail inflation is likely to remain around or even above 9 per cent in the months ahead, the RBI statement said.

Following Tuesday’s move, bankers are of the view that short-term deposit rates may come down thanks to the MSF rate cut. However, lending rates could hold at the current level for some more time.

Arundhati Bhattacharya, Chairperson, State Bank of India, said: “Yes, some rate changes could be expected but I think we should wait for ALCO (Asset Liability Committee) meet.

“The policy has been balanced. We appreciate that the limit on repo has been increased. It is premature to comment on the rate movement.”

GDP growth

The RBI, however, pared the GDP growth projection to 5 per cent for FY2014 from 5.5 per cent projected earlier. It observed that the revival of large stalled projects and the pipeline cleared by the Cabinet Committee on Investment may buoy investments and overall economic activity towards the close of the year.

(This article was published on October 29, 2013)
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