The RBI acted on expected lines by hiking the repo rate as inflation remained at elevated levels and lowering the MSF rate.
As widely expected, Reserve Bank (RBI) Governor Raghuram Rajan on Tuesday raised repo rate by 25 bps to 7.75 percent and rolled back MSF rate by 25 bps to 8.75 percent on normalised forex situation while leaving CRR unchanged at 4 percent.
In its second quarter monetary policy review, the RBI also increased the liquidity provided through term repos of 7-day and 14-day tenor from 0.25 percent of NDTL of the banking system to 0.5 percent with immediate effect.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 percent and the Bank Rate stands reduced to 8.75 percent with immediate effect. With these changes, the MSF rate and the Bank Rate are recalibrated to 100 basis points above the repo rate.
Repo rate is the effective policy rate that decides lending rates in the economy.
The RBI monetary policy stance and measures "are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth," Raghuram Rajan said.
"These will help strengthen the environment for economic growth by fostering macroeconomic and financial stability. The Reserve Bank of India will closely monitor inflation risk while being mindful of the evolving growth dynamics," Raghuram Rajan said.
Consensus on the street pointed to a 25 bps rate hike to 7.75 percent and rolling back of emergency measures applied to tame the rupee. In his previous monetary policy review, announced weeks after assuming office as RBI governor, Rajan stunned market by raising repo rates
The RBI has been struggling for a year now to bring down inflation which has remained stubbornly high despite all possible measures, which led to slowdown in growth. Meanwhile, annual food inflation touched its highest point since mid-2010 to 18.4 percent in September.
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