Mid-Quarter Monetary Policy Review: Read full statement by Raghuram Rajan

Sep 20 2013, 13:19 IST
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'Easing the exceptional liquidity measures was warranted given that the external environment has improved, says RBI Governor Raghuram Rajan. 'Easing the exceptional liquidity measures was warranted given that the external environment has improved, says RBI Governor Raghuram Rajan.
SummaryRBI Governor surprised industry and shocked the stock markets by hiking the short-term policy rate.

RBI Governor Raghuram Rajan on Friday surprised the industry and shocked the stock markets by hiking the short-term policy rate by 0.25 per cent to keep "worrisome" inflation under check, a move that may increase EMIs for home and auto loans in the medium term.

Following is Raghuram Rajan's statement on RBI's mid-quarter monetary policy review:

"Good Afternoon. In the mid-quarter review today, we began a calibrated change in the exceptional liquidity measures we introduced in July by cutting the Marginal ‘Standing Facility rate, which is the effective policy rate today by 75 basis points or 0.75 percentage points.

We also reduced the minimum daily CRR balance that banks have to maintain to 95% of the requirement.

We believe that easing the exceptional liquidity measures was warranted given that the external environment has improved and given that the Government and the RBI have used the time since the measures were put in place to narrow the current account deficit and to ease its financing.

The calibrated withdrawal will provide a boost to growth, reduce the financing distortions that are emerging in the market, and reduce the strain on corporate and bank balance sheets. We remain vigilant about external market conditions and will do what is necessary if they deteriorate once again.

We have also announced an intention to return to normal monetary operations where the repo rate will return to being the effective policy rate and liquidity conditions need not be as tight as they currently are. Let me emphasize that the difference between the MSF and repo rate will be brought down to 100 basis points. At the same time, recognizing that inflationary pressures are mounting and determined to establish a nominal anchor which will allow us to preserve the internal value of the rupee, we have raised the repo rate by 25 basis points.

The intent here is that when the repo rate becomes the effective policy rate, it should be consistent with inflationary conditions in the economy. On net, these measures will reduce the cost of bank financing substantially while allowing us to take an appropriately precautionary stance on inflation.

Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike.

At the Reserve Bank of India, my colleagues and I have been busy developing the measures we announced

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