RBI hikes repo rate by 0.25 percent

Inflation worries forced the Reserve Bank to continue its firm stance and hike the short-term lending (repo) rate by 0.25 per cent, a step that will make corporate and consumer loans more expensive.

There was no surprise in the first full policy unveiled by new RBI Governor Raghuram Rajan on Tuesday, who increased the repo rate, as was widely expected, by 0.25 per cent to 7.75 per cent and brought down the cost of short-term funds for banks by slashing the marginal standing facility (MSF) rate by a similar quantum to 8.75 per cent.

The policy stance and measures, Mr. Rajan said, “are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.

“These will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics,” he said.

The central bank reduced the growth forecast for the current fiscal to 5 per cent from 5.5 per cent projected earlier. Economic growth fell to a decade-low of 5 per cent in the previous financial year.

The RBI left other rates unchanged, such as the cash reserve ratio at 4 per cent, and mandatory holdings in government securities and other liquid assets as a solvency measure (SLR) at 23 per cent.

However, the Governor doubled the borrowing limit of banks against their cash positions or NDTL to 0.5 per cent for both 7-day and 14-day repos, with immediate to increase liquidity in the system.

Lowers growth forecast

The Reserve Bank on Tuesday scaled down the growth forecast for current fiscal to 5 per cent from the earlier projection of 5.5 per cent, citing downside risk stemming from domestic constraints.

” … headwinds to growth from domestic constraints continue to pose downside risks, and vulnerabilities to sudden shifts in the external environment remain,” RBI Governor Raghuram Rajan said in the second quarter review of monetary policy.

The RBI had projected a growth of 5.5 per cent for 2013-14 in its first quarter monetary policy on July 30.

The economy grew by 4.4 per cent in the first (April-June) quarter of current fiscal. It had expanded by 5 per cent in 2012—13 fiscal, the lowest level in a decade.

“Strengthening export growth and signs of revival in some services, along with the expected pick-up in agriculture, could support an increase in growth in the second half of 2013-14 relative to the first half,” Mr. Rajan said.

He said the revival of large stalled projects and clearances by the Cabinet Committee on Investment (CCI) would buoy investment and overall economic activity towards the close of the year.

The RBI’s projections are in line with that of the World Bank and International Monetary Fund (IMF) which lowered the growth forecast for India earlier this month.

The World Bank slashed India’s economic growth forecast for the current financial year to 4.7 per cent from an earlier projection of 6.1 per cent. Besides, IMF projected an average growth rate of about 3.75 per cent for India in 2013-14.

Mr. Rajan said industrial activity has weakened with a contraction in consumer durables and capital goods sector, reflecting ongoing downturn in both consumption and investment demand.