Reserve Bank of India (RBI) Governor Raghuram Rajan today shocked investors by unexpectedly raising the key repo rate by 25 basis points to combat rising inflation, even as he partially rolled back some of the liquidity tightening measures to fight the currency slide.
The Reserve Bank raised repo rate or the rate at which it lends to banks by 25 basis points to anchor inflation and inflationary expectations.
The repo rate is increased to 7.5 percent from 7.25 percent with immediate effect.
Similarly, the reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.5 percent. ‘As the measures are unwound, the objective is to normalise the conduct and operations of monetary policy so as to allow the LAF repo rate to resume its role as the operational policy interest rate,’ said RBI.
‘However, inflation is high and household financial saving is lower than desirable.
As the inflationary consequences of exchange rate depreciation and hitherto suppressed inflation play out, they will offset some of the disinflationary effects of a better harvest and the negative output gap.’
The RBI reduced the marginal standing facility rate by 75 basis points to 9.5 percent from 10.25 percent with immediate effect.
The measure was taken to tighten liquidity and arrest volatility in the foreign exchange market.
The intent has been to maintain tight liquidity conditions at the short end of the term structure until the measures designed to alter the path of the CAD and improve prospects for its stable funding take effect.
The RBI reduced minimum daily maintenance of the cash reserve ratio (CRR) from 99 percent of the requirement to 95 percent effective from the fortnight beginning September 21, while keeping the CRR unchanged at four percent.
‘The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand. Keeping all this in view, bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately,’ Mr Rajan said in the mid-quarter policy review statement. Driven by costlier food items, wholesale price inflation (WPI) rose to a six-month high of 6.1 pc in August.
The central bank said it is now possible to contemplate easing exceptional cash tightening measures in a calibrated manner.
The RBI said that any further change in the minimum daily maintenance of the CRR is not contemplated.