Reserve Bank of India Governor Raghuram Rajan raised the key repo rate on Tuesday, choosing once again to confound expectations while renewing focus on inflation as also the threat stemming from the weakening of the rupee amid a sell off that has rippled through emerging markets. The Indian currency recovered sharply after the policy announcement.
“The gravest risk to the value of the rupee is from CPI (consumer price index) inflation which remains elevated at close to double digits, despite anticipated disinflation in vegetable and fruit prices,” Rajan said. If RBI can bring inflation down, “that will give us some room on the monetary front which can then be passed through. But first let’s fight the fight that needs to be fought”, he said.
The repo rate, at which banks borrow short-term money from RBI, was raised by 25 basis points, or 0.25 percentage point, to 8%. The reverse repo, at which RBI borrows from banks, was raised 25 basis points to 7%. The marginal standing facility, the penal rate of interest for banks, was raised 25 basis points to 9% to maintain the corridor. The cash reserve ratio was unchanged at 4%.
Rajan may be done with rate increases for now, although he said the central bank’s policy decisions will be dependent on data.
This is the third time that Rajan has raised rates after taking over as governor in September last year — an increase of 75 basis points in four months. RBI’s decision came amid a worldwide market turmoil sparked by fears of the US scaling back its stimulus programme more sharply than expected, concerns that the Chinese economy may falter and a devaluation of Argentina’s peso raising the prospect of a contagion effect. Turkey’s lira fell for 10 days in a row before the central bank stepped in to call ameeting on the issue, leading to the currency recovering on expectations that the country’s central bank will raise rates effective midnight.
The rupee posted its biggest one-day gain in a month to close at 62.51 to the dollar, up from Monday’s close of 63.10. The yield on the benchmark bond fell two basis points to 8.75%, ending a five-day rise, having risen to 8.77% on Monday, the highest in more than two weeks. Bond yields and prices move in opposite directions. The benchmark Sensex was little changed, declining 0.12% to 20,683.51 points, suggesting that the market had either factored in the changes or took comfort from Rajan’s statement that he was finished with rate changes for now. The governor said the “slowdown in the economy is getting increasingly worrisome”. Growth slumped to a 10-year low of 5% in FY13 and shows little sign of reaching even that level this year. But tighter policy action aimed at puncturing the inflation balloon will help revive growth, he argued, although industry has been pushing for the opposite.
“The gravest risk to the value of the rupee is from CPI (consumer price index) inflation which remains elevated at close to double digits, despite anticipated disinflation in vegetable and fruit prices,” Rajan said. If RBI can bring inflation down, “that will give us some room on the monetary front which can then be passed through. But first let’s fight the fight that needs to be fought”, he said.
The repo rate, at which banks borrow short-term money from RBI, was raised by 25 basis points, or 0.25 percentage point, to 8%. The reverse repo, at which RBI borrows from banks, was raised 25 basis points to 7%. The marginal standing facility, the penal rate of interest for banks, was raised 25 basis points to 9% to maintain the corridor. The cash reserve ratio was unchanged at 4%.
Rajan may be done with rate increases for now, although he said the central bank’s policy decisions will be dependent on data.
This is the third time that Rajan has raised rates after taking over as governor in September last year — an increase of 75 basis points in four months. RBI’s decision came amid a worldwide market turmoil sparked by fears of the US scaling back its stimulus programme more sharply than expected, concerns that the Chinese economy may falter and a devaluation of Argentina’s peso raising the prospect of a contagion effect. Turkey’s lira fell for 10 days in a row before the central bank stepped in to call ameeting on the issue, leading to the currency recovering on expectations that the country’s central bank will raise rates effective midnight.
The rupee posted its biggest one-day gain in a month to close at 62.51 to the dollar, up from Monday’s close of 63.10. The yield on the benchmark bond fell two basis points to 8.75%, ending a five-day rise, having risen to 8.77% on Monday, the highest in more than two weeks. Bond yields and prices move in opposite directions. The benchmark Sensex was little changed, declining 0.12% to 20,683.51 points, suggesting that the market had either factored in the changes or took comfort from Rajan’s statement that he was finished with rate changes for now. The governor said the “slowdown in the economy is getting increasingly worrisome”. Growth slumped to a 10-year low of 5% in FY13 and shows little sign of reaching even that level this year. But tighter policy action aimed at puncturing the inflation balloon will help revive growth, he argued, although industry has been pushing for the opposite.
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