Moneycontrol Bureau
Continuing its fight against inflation, the Reserve Bank of India raised repo rate by 25 bps to 7.5 percent in its mid-quarter policy review. The move sent shockwaves through the investor community which culminated into sharp sell-off in the equity market.
The policy, however, reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 percent and lowered the minimum daily maintenance of the cash reserve ratio (CRR) from 99 percent to 95 percent of the requirement, effective from the fortnight beginning September 21, 2013.
Consequently, the reverse repo and Bank Rate rates stand adjusted to 6.5 percent and 9.5 percent, respectively. The RBI ruled out additional change in minimum daily maintenance of the CRR but clarified that further actions need not be announced only on policy dates.
Reacting to the policy announcement, the rupee fell 1 percent, bond yield rose to 8.3 percent, and share prices of banking stocks witnessed a sharp decline. Benchmark indices gave up all the gains accumulated in anticipation of a growth-oriented RBI policy and the positive outlook post Fed's no-taper policy on September 18.
Contrary to market expectations, the new governor Raghuram Rajan's maiden policy came in as hawkish, primarily because it maintained the traditional apex bank's views on (controlling) inflation.
The RBI noted that WPI inflation, which had eased in Q1 of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices. "What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence," Rajan's policy stated.
Most of the economists polled by CNBC-TV18 were expecting the RBI to bring down the daily requirement to 90 percent of CRR, while a few expected it to come down below 90 percent.
Jahangir Aziz of JPMorgan had opined that MSF should be brought back to its old level and instead repo rate should be hiked by about 50 bps.
In a bid to control liquidity, the RBI had last month restricted banks from borrowing at 7.25 percent from the repo window. It had forced them to borrow at a higher rate of 10.25 percent from MSF.
jhini.phira@network18online.com
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