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The Reserve Bank of India (RBI) on Tuesday stayed focused on taming inflation, raising the key repo rate by 25 basis points to 7.75% while simultaneously taking the sting out of the rate hike by easing liquidity and unwinding special measures intended to support the rupee.
The central bank also pared its GDP growth projection for the current year to 5% from 5.5% and, for the first time, offered a projection for consumer price inflation (CPI), saying it expects CPI to remain around or even above 9% in the months ahead, absent policy action.
Explaining his policy stance, RBI governor Raghuram Rajan /b> said it was important to break the spiral of rising price pressures in order to curb the erosion of financial savings and strengthen the foundations of growth. Curbing mounting inflationary pressures and managing inflation expectations 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, Rajan said.
The RBI believes better exports along with an uptick in some services and agriculture could support a pick-up in growth in the second half of FY14. It also expects the revival of large stalled projects to buoy investment activity towards the close of the year.
Bankers comments on the direction of interest rates were cautious. Arundhati Bhattacharya, chairperson, State Bank of India (SBI), said: I think there will be some change in rates. Which way and what, you will have to wait for the ALCO meetings to happen. Bhattacharya confirmed the banks ALCO would meet over the next 24 hours.
The cost of funds would have gone up over the last three months and as we are now going back to the normal monetary policyover a period of time, it would come down, Aditya Puri, MD and CEO, HDFC Bank, observed.
While the RBI chose not to give a clearer guidance of future rate action, another round of interest rate hikes is not being ruled out. What we have said is that we are comfortable with where we are based on the environment we see as well as the projections we have made on the evolving path of the economy. Going forward, if the data comes in any different stronger or weaker obviously, we will have to take steps accordingly, the governor said.