RBI policy review: 'Worried' Raghuram Rajan pulls surprise, raises repo rate 25 bps, CRR left unchanged

Jan 28 2014, 16:53 IST
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Raghuram Rajan's RBI raised its policy repo rate by 25 basis points to 8.00 percent. (PTI) Raghuram Rajan's RBI raised its policy repo rate by 25 basis points to 8.00 percent. (PTI)
SummaryRBI policy review: Governor Raghuram Rajan announces repo rate hike, hits markets.

particularly because of Service sector and Industrial sectors impact on inflation.

Though GDP growth is expected to be sub 5% level this year, Governor has taken decision to hike Repo rate to maintain Price Stability and to contain depreciation of Rupee which are the primary objectives of RBI. At the same time by not increasing CRR, RBI has also taken care of ensuring the availability of adequate liquidity to support the growth in the economy. Governors speech has given an indication that inflation is expected to be under control and there will not be any consequent further hike in Repo rate in near future. As a matter of policy MSF also be increased to 9% to maintain gap of 100 bps between Repo and MSF rates. Overall, it is a balanced approach being adopted by RBI.

Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited

RBI has hiked policy rates by 25bps as per the expectations, the stance has moved by a margin from growth concerns to worries on high core inflation. The move comes at the time when bond markets were stuck with volatile macro variables and new framework proposed by deputy Governor. RBI has indicated that at current level of repo rate they are comfortable to guide the system that as per their forecast of inflation for next 12months monetary stance will remain unchanged, RBI also indicated that if inflation drops below their expected path they may even ease in future. For bond markets this will be positive news as uncertainty on extent of hikes will be removed and if inflation does indeed fall sharply expectations on rate cuts will emerge. We expect CPI & WPI inflation would drop significantly due to fall in food inflation, however sharp fall beyond range expected by RBI cant be predicted with certainty and hence we expect bond yields will not be in a hurry to drift in either direction. On external front, risk off sentiments have emerged again and rupee has deprecated accordingly however since fundamentals of economy have improved on relative basis rupee should not react sharply as seen in Q2, we expect RBI may not take any tightening measures to protect the currency.


"I think it's reasonable to say in the next policy they will stay on hold, but beyond that a rate hike cannot be ruled out. What is more important

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