India Raises Policy Repo Rate to 7.75%

The Reserve Bank of India has raised its policy repo rate for the second consecutive month by 25 basis points to fight high inflation and rolled back an emergency measure put in place in July to support the rupee.
Reserve Bank of India | 10/29/2013 8:43:03 AM

Exerps from The Reserve Bank of India Second Quarter Review of Monetary Policy 2013-14

Following an assessment of the evolving macroeconomic situation, the Reserve Bank has decided to: reduce the marginal standing facility (MSF) rate by 25 basis points from 9.0 per cent to 8.75 per cent with immediate effect; increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5  per cent to 7.75 per cent with immediate effect, keep cash reserve ratio (CRR) unchanged at 4.0 per cent of net demand and time liability (NDTL); and increase the liquidity provided through term repos of 7-day and 14-day tenor from 0.25 per cent of NDTL of the banking system to 0.5 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 per cent and the Bank Rate stands reduced to 8.75 per cent with immediate effect. With these changes, the MSF rate and the Bank Rate are recalibrated to 100 basis points above the repo rate.

Inflation measured by the wholesale price index (WPI) rose in September for the fourth month in succession. The pass-through of rupee depreciation into prices of manufactured products is acting, along with elevated food and fuel inflation, to offset possible disinflationary effects of low growth. While food price pressures may ease with the arrival of the kharif harvest and the usual seasonal moderation, overall WPI inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response.

Retail inflation measured by the consumer price index (CPI) has also risen sharply across food and non-food constituents, including services, keeping inflation expectations high. Notwithstanding the expected edging down of food inflation, retail inflation is likely to remain around or even above 9 per cent in the months ahead, absent policy action.

India Raises Policy Repo Rate to 7.75%