In his first monetary policy review since taking office on September 4, RBI Governor Raghuram Rajan increased the repo rate by 25 basis points. However, the economists had widely expected no change in the repo rate.

What Experts Say?

Anjali Verma, Chief Economist, Phillipcapital, Mumbai:

Hiking the repo rate was unexpected. The governor is clearly worried about inflation. He is saying the improved international conditions will take care of the current account deficit funding and his focus will shift to fiscal deficit and inflation, which were taking a backseat.

Upasna Bhardwaj, Economist, Ing Vysya Bank, Mumbai:

While partial rollbacks of the exceptional measures were expected, RBI clearly has highlighted the need to anchor inflationary expectations by raising the repo rate. We expect inflationary concerns to continue to remain the dominant factor driving the trajectory for repo rate going ahead.

Rupa Rege Nitsure, Chief Economist, Bank Of Baroda, Mumbai:

RBI has done excellent calibration today to bring India on par with other emerging market economies which have already raised policy rates.

It is a clear and transparent signal. Also by easing short-term rates and liquidity, it has reduced the stresses on the shorter-end of the yield curve. It should be noted that this easing is partial so as to avoid a possible speculative response."

R. Sivakumar, Head of Fixed Income, Axis Mutual Fund, Mumbai:

It is a very mixed policy, we have a rate cut and a rate hike in the same document. From a medium-term perspective, we see LAF rate becoming the operative rate that is clear, however the LAF rate itself will be higher than it cost before. While we do expect yields to settle down over a period of time, it will be at a higher level. Net net, the market is treating it as a rate hike rather than a rate cut.

"What's clear from a policy-making perspective is that the shift from WPI (wholesale price index) to CPI (consumer price index) will happen. And a very low core WPI inflation is not going to help bring rates down given that CPI is at 9.5 percent."

BACKGROUND

•    Food inflation accelerated to a three-year high of 18.18 percent in August, government data released on Monday showed, driving the benchmark Wholesale Price Index up by a stronger-than-expected 6.1 percent.

•    Industrial output rose 2.6 percent in July from a year earlier, its first expansion in three months, lifted by a robust rebound in capital goods production - often seen as a barometer for investments in Asia's third-largest economy.

•    Some Indian companies could see the quality of their debt decline as higher global borrowing costs and a sharply weaker rupee take their toll, Moody's Investors Service said last week.

•    Foreign banks are pushing to raise billions of dollars from expatriate Indians in response to New Delhi's drive to defend its weak currency, which could mean the government can avoid the need for a sovereign bond or state-backed deposit scheme to attract inflows.

•    India increased the import duty on gold jewellery to 15 percent from 10 percent on Tuesday, in a move aimed more at protecting the domestic jewellery industry rather than stemming overseas purchases to narrow its current account deficit.

(Agencies)

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