Reserve Bank of India

October 30, 2013

Tuesday’s meeting ended with an announced hike of India’s repo rate to 7.75% and reverse repo to 6.75%.  Similarly sized hikes were done on September 20th.  At the same time, the marginal standing facility rate was cut 25 bps to 8.75%.  These changes restore operational responsibility for monetary policy to the repo and reverse repo rates and underscore that inflation-reduction is the top priority of the Bank’s new leadership.  In a statement from the RBI, these objectives are explained:

From September, as steps to contain the current account deficit started taking effect in an improving external environment, volatility in the foreign exchange market ebbed and it became possible to unwind the exceptional liquidity tightening measures. Keeping in view the need to infuse liquidity into the system to normalise liquidity conditions, term repos will now be conducted for a total notified amount equivalent to 0.5 per cent of NDTL of the banking system. In addition, the MSF rate will be reduced by 25 basis points.

With the more recent upturn of inflation, and with inflation expectations remaining elevated anticipating the pass-through of exchange rate depreciation and ongoing adjustment in administered fuel prices, it is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth. It is in this context that the LAF repo rate has been increased by 25 basis points.

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.

The policy stance and measures in this review are 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.

Governor Rajan has moved quickly to reverse a downward trend in the repo rate.  Such was previously cut by 50 bps in April 2012 and 25 bps each in March 2013 and May 2013.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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