- At RBI policy review, repo rate hiked: Raghuram G Rajan speechEconomic growth in India likely to slip below 5 per cent in 2013-14: RBIEconomic growth in India likely to slip below 5 per cent in 2013-14: RBIRBI policy review effects repo rate hike, bank share prices fall, SBI, Bank of Baroda hit
Reserve Bank Governor Raghuram Rajan today again surprised the markets and raised the key policy rate by 0.25 per cent to 8 per cent in a bid to curb inflation, a move that may translate into higher EMIs and push up the cost of borrowing for corporates.
"...an increase in the policy (repo) rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path," Rajan said while unveiling the Third Quarter Review of Monetary Policy.
Consequently, the reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent.
However, the RBI kept the cash reserve ratio unchanged at 4 per cent as liquidity seems to be comfortable.
It was widely expected that Rajan would maintain the status quo on rates to support growth. Ahead of the quarterly review, Rajan had termed inflation a "destructive disease."
The Governor said economic growth would be below 5 per cent in the current financial year and could accelerate in 2014-15 to a mean projection of 5.5 per cent.
In line with the Urjit Patel committee recommendations, monetary policy reviews will henceforth be undertaken every two months, consistent with the availability of key macroeconomic and financial data, Rajan said.
The RBI's baseline projections for retail inflation indicate that over the ensuing 12-month horizon, and with the current policy stance, there are upside risks to the central forecast of 8 per cent.
"The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture," he said.
The repo rate hike is likely to have a bearing on interest rates and may push up the cost of funds for retail as well as corporate borrowers.
Following policy announcement, the stock markets fell sharply but quickly recovered and were trading almost flat at 11.30 am.
While core inflation data was steady in December, Rajan said prices are hardening in the services sector and in key intermediates.
This, seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales, indicates that aggregate demand pressures are still imparting an upside to overall inflation.
"It is critical to address these risks to the inflation outlook resolutely in order