In its second quarter review of the monetary policy for 2013-14, the RBI hiked repo rate by 25 basis points or 0.25 percent to 7.75 percent. Repurchase or repo rate is the rate of interest that banks pay when they borrow money from the central bank to meet their short-term funds requirement.

This is the second increase in the policy rate in less than two months. The central bank had also hiked the repo rate by 0.25 percent in its previous review announced Sep 20.

Taking a cue from the stability in the currency markets, the RBI rolled back some of the measures put in place to support the rupee. The Marginal Standing Facility (MSF) rate is reduced by 0.25 percent to 8.75 percent. The move will ease liquidity in the banking system. MSF is a window for banks to borrow from the RBI.

“With the reduction of the MSF rate and the increase in the repo rate in this review, the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete,” RBI Governor Raghuram G. Rajan said in the policy statement.

The RBI generally maintained a 100 basis points gap between repo and MSF rate. But this gap was altered recently to support the battered rupee. With the changes now the gap is back to the usual 100 basis points.

Rajan said the policy stance and measures in the review were intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth.

Annual wholesale price index-based inflation jumped to a seven-month-high of 6.46 percent in September, while consumer price index-based inflation was recorded at 9.84 percent, largely due to higher food and fuel prices.

Rajan, who took charge as RBI governor on September 4, said both wholesale and consumer price inflation are likely to remain elevated in the months ahead, warranting an appropriate policy response.“The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics,” he said.

Rajan's statement gives indication that the RBI would hike rates again if inflation remained high. “The message from RBI is clear, as long as inflation is around, asking for a rate cut would remain a wish list,” said Rana Kapoor, president of industry body Assocham.  Kapoor, who is also managing director of Yes Bank, said, “All efforts must be made through coordinated efforts by the centre, states and the RBI to fight price rise so that the economy can be brought back to the growth trajectory.”

The RBI has cut economic growth forecast for the current financial year to 5 percent from its earlier projection of 5.5 percent. “While industrial activity has weakened, strengthening export growth, signs of revival in some services along with the expected pick-up in agriculture could increase the real GDP growth from 4.4 percent in the first quarter to a central estimate of 5 percent for the year as a whole,” Rajan said.

Reacting to the RBI move, the Confederation of Indian Industry (CII) said the hike in repo rate has come as a disappointment to industry especially as the investment climate continues to be weak and growth outlook remains muted.

“The RBI could have refrained from affecting a hike in repo rate as industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation,” CII said in a statement.

Highlights of RBI monetary policy

Following are the highlights of the Central Bank's second quarter review of the Annual Monetary Policy Statement for 2013/14:


•    Repo rate hiked by 25 bps to 7.75 pc
•    Reverse repo rate rises to 6.75 pc
•    Banks' cash reserve ratio unchanged at 4 pc
•    Marginal Standing Facility Rate (MSF) cut by 25 bps to 8.75 pc
•    Increases cash provided to banks through term repo to 0.50 pct of net demand and time liability from 0.25 pc


•    WPI inflation to remain higher than current levels, warranting "appropriate policy response"
•    Important to break the spiral of rising price pressures in order to curb the erosion of financial saving
•    Process of realigning interest rate corridor to normal monetary policy operation now complete
•    Will closely monitor inflation risks while being mindful of the evolving growth dynamics


•    India's GDP growth at 5 percent for 2013/14
•    Retail inflation likely to remain around or even above 9 percent without policy action


•    Foreign banks setting up wholly-owned subsidiaries will be given near-national treatment, to issue scheme by mid-Nov
•    Initial minimum paid-up voting equity capital or net worth for wholly owned foreign bank's subsidiary will be USD 5 billion

More durable way for banks to mitigate mismatch in demand and supply of cash is to step up efforts to mobilise deposits

•    Draft report on Basel III capital framework likely by end-November
•    Draft of proposed framework for domestic systemically important banks by end-November
•    To issue updated guidelines on stress testing for banks by end-November
•    To give banks option to pay interest on savings deposits and term deposits at intervals shorter than quarterly intervals
•    First meeting of High Level Advisory Committee on new bank licences on November 1
•    To issue guidelines on restructuring for non-bank finance companies (NBFCs) by end-November


•    To issue 10-year retail inflation-indexed securities in November/December
•    To launch 10-year interest rate futures contracts by end-December
•    Allows partial credit enhancement for corporate bonds by banks via credit, liquidity facilities
•    To issue final guidelines on unhedged foreign currency exposures by end-December
•    To revise timings for conducting MSF operations from November 5 between 1330 GMT and 1400 GMT
•    To close special repo window for mutual funds with immediate effect

What Experts Say?


"The policy was on expected lines. The good thing is that the liquidity was increased by way of an increase in term repo limits, but another hike is still possible given that the policy stance is still hawkish -- not dovish at all. He has cut the growth rate expectation and raised the WPI estimate, we should expect more (interest rate) hikes in the future."


"The comments so far from RBI suggests still hawkish bias in monetary policy setting, which is likely to be good as the focus is on anchoring inflation to facilitate future growth framework. Also, efforts on reducing CAD (current account deficit) is bearing fruits."


"I didn't find him (the RBI Governor) ultra-hawkish. However, the comfort with which he has brought back normalisation of monetary policy shows his increasing comfort on the external sector.

"Secondly, while the repo rate is going to be higher than what it was pre-May, he did say that he would be mindful of some of the growth concerns, which seems to suggest that there may not be sharp, severe hikes in repo. There would be a calibrated approach, although we do not rule out one repo rate hike of 25 basis points. If at all, the rate hike would be front loaded, likely to be in the next policy."


"RBI has continued and completed its calibration process with the Repo MSF difference now at 1 percent. The provision of another 0.5 percent on term repo would mean that along with Repo and standing liquidity facility, the overnight rate would cease to be at MSF but move between the Repo and the MSF (around 8.25%).

"It's a fairly neutral policy for long bond markets and further movements in yields should take cues from demand (and) supply. The overall guiding focus remains on inflation and one can't rule out another 25-50 bps hike till March next year -- if inflation remains sticky and if growth picks up."


"The policy stance clearly reflects an inflationary concern while ensuring smooth liquidity measures in place to take care of the growth moderation. Today's policy tone indicates more of selective liquidity support measures while lowering the probability of repo ease in the subsequent meet.

"With higher inflationary pressure still intact, we expect the monetary policy to revolve around higher repo with smoother systemic liquidity. We believe the bond market has factored in the current phase of high repo-smooth liquidity and hence the yield curve is expected to remain range bound in the current quarter."


"The RBI policy has certainly become more transparent as it has fulfilled market expectations of 25 bps hike in repo and 25 bps cut in MSF. As market expectations have been fulfilled there will not be any knee-jerk reaction across financial markets.

"Normalisation of the exceptional measures and the provision of additional liquidity support is positive for both the bond and credit markets. However, the reduction in the GDP estimate and increase in the inflation forecast underscores the possibility that India is passing through a stagflationary phase making the working of monetary policy in isolation difficult.

"Going ahead, there will have to be better co-ordination between monetary, fiscal and exchange rate policy in order to be able to tide over the current stagflationary phase."


"Reducing the MSF rate by 25 basis points and improving the liquidity provided through term repos will reduce short-term rates, which will keep interest rates on home loans stable.

"Hike in the repo rate shows that the monetary policy continues to address the persistent inflation, which remains high when compared with other emerging market economies. Growth for now will have to be addressed by removing infrastructure bottlenecks and other structural policy measures."


"Today's move was a follow-through of the hawkish September policy guidance as high and persistent inflation is seen as an impediment to the medium-term growth outlook. The new policy approach is a single-minded focus to contain inflationary expectations, with or without support from fiscal policy.

"This might carry short-term hurt to growth, but either way an accommodative monetary policy cannot spur recovery in isolation. On the other hand, however, risks that inflation might become generalised and entrenched are more material.

"With the cut in the MSF (Marginal Standing Facility) rate, the effective corridor now narrowed to 100 bps between the MSF and Repo rate....Going forward, there is still room for the other liquidity constraints to be unwound, but in a gradual and calibrated manner."


The rupee strengthened rose to 61.52 per dollar from around 61.63 before the RBI decision.

The benchmark 10-year bond yield fell 6 basis points (bps) to 8.58 percent from levels before the decision, traders said.

The 5-year overnight index swap fell 7 bps to 8.20 percent, while the 1-year OIS fell 9 bps to 8.36 percent.

Shares gained, with the NSE banking sub-index up up 1 percent from being up around 0.3 percent before the RBI decision.


- Food inflation accelerated to a three-year high of 18.40 percent in September mainly on higher vegetable prices, including a 322 percent jump in onion prices, driving the benchmark Wholesale Price Index up by a stronger-than-expected 6.46 percent.

- Industrial output growth unexpectedly slowed to 0.6 percent in August from a year earlier, from an upwardly revised 2.75 percent pace in July, hurt by weak investment and consumer demand.

- India's economic growth hit a four-year low of 4.4 percent in the quarter through June, lower than expected and hurt by a contraction in mining and manufacturing.


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