New Delhi: Surprises with 25 bps repo rate hike, but slashes MSF rate by 75 bps and cuts daily CRR to 95% to ease liquidity.“Of course we are anti-inflation,” said Raghuram Rajan, the governor of the Reserve Bank of India (RBI) after the announcement of the mid-quarter monetary policy review on Friday, spelling out his immediate priority at the job, which he has taken up just over a fortnight back. The central bank hiked the key policy rate by 25 basis points (bps) to 7.5% as a pre-emptive measure to anchor inflationary expectations, taking almost everybody by surprise. “In the absence of an appropriate policy response, wholesale price index inflation will be higher than initially projected over the rest of the year,” said Rajan in his maiden policy review.
“What is equally worrisome is that inflation at the retail level, measured by the consumer price index, has been high for a number of years, entrenching inflation expectations at the elevated levels and eroding consumer and business confidence,” he said. After 19 months of inflation fighting and a pause of five months, RBI had finally started cutting rates to support growth from April 2012 to May 2013. Then, rupee played spoilsport and RBI refrained from cutting policy rates further.Since June, inflation started moving up as the impact of rupee depreciation sunk in and that prompted RBI to go back to hiking policy rates.“The new governor’s focus will be on containing inflation, and hence the policy rate trajectory is likely to remain upward sloping,” said Anubhuti Sahay and Samiran Chakraborty, economists at Standard Chartered Bank. “For the economy, interest rates will likely be much higher than assumed thus far, and growth should be weaker in the near term,” said Sonal Varma, chief India economist at Nomura.
Governor Rajan, however, is of the view that anchoring inflationary expectations is important and “the knowledge that inflation will be lower can actually enhance growth prospects rather than reduce growth prospects”.“The RBI’s policy statement subtly hints at a potentially larger role for the government in reviving growth,” Siddhartha Sanyal and Rahul Bajoria, economists at Barclays said in a report. On the brighter side, the RBI cut the marginal standing facility rate by 75 bps to 9.5% and reduced the daily cash reserve ratio requirement to 95% from 99% to help banks better manage liquidity. “It is a mixed bag for the banks so far as their lending rates are concerned. However, we do not expect any cut in the base rate of the banks. On the contrary, in select cases it might actually go up,” said S K Sinha and D K Pant, economists at India Ratings. India’s major banks had already hiked their deposit as well as lending rates in the past month owing to tight liquidity conditions. Rest is expected to follow suit.
Bureau Report
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