Continuing its focus towards tackling high inflation, the Reserve Bank of India’s (RBI) Governor, Raghuram Rajan in his second monetary review on Tuesday hiked the repo rate again by 0.25 per cent of 25 basis points (bps) to 7.75 per cent. Along with that RBI also announced a 0.25 per cent or 25 bps cut in the marginal standing facility (MSF) to 8.75 per cent.
On one hand, the rate hike would cause corporate and consumer loans to get more expensive while on the other the cut in MSF would bring down the cost of short-term funds for the banks. Explaining RBI’s approach towards the rate hike, Rajan said that the policy stance and measures were 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 added.
Apart from the two major changes, the central bank left other key rates unchanged. The cash reserve ratio (CRR) and the statutory liquidity ratio (SlR) are being maintained at 4 per cent and 23 per cent respectively. The Governor, however, doubled the borrowing limit of banks against their cash positions, also known as net demand and time liability (NDTl) to 0.5 per cent for both 7-day and 14-day repos, with immediate to increase liquidity in the system.
Expressing concern over the rising inflation, Rajan said, “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.” The wholesale price index (WPI) has been rising since last for months to 6.46 per cent in September. Retail inflation also rose marginally to 9.84 per cent in September due to a hike in food prices, particularly of vegetables.
During the policy review, central bank also reduced the growth forecast for the current fiscal to 5 per cent from 5.5 per cent projected earlier. The economy grew by 4.4 per cent during the April- June quarter in FY14. It had expanded by 5 per cent in FY13, the lowest level in a decade. With half year over, RBI expects to see a revival in growth and adding to that, Rajan said, “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.”
RBI also announced its decision to close the special window for commercial banks to meet the cash requirements of mutual funds (MFs). Back in July, the central bank had opened a special borrowing window of Rs 25,000 crore to help the crisis-ridden mutual funds to counter the impact of liquidity crunch. “With the normalisation of exceptional measures and taking into consideration the improvement in liquidity conditions since then, it has been decided to close this window with immediate effect,” RBI Governor Raghuram Rajan added. RBI, on July 17, had opened a special three-day repo auction window through with banks were encouraged to raise Rs 25,000 crore at 10.25 per cent for lending to mutual funds.
The RBI Governor stated that he is mindful of growthconcerns and expressed worries that there could be some downward risks to the 5 per cent GDP growth projection if the global economy falters. “We don’t want to create a situation where we drive rates so high that the economy collapses and then we have deflation rather than inflation,” Rajan said. When asked about the core focus of the RBI in its fight against inflation, RBI Governor said, though traditionally RBI has been using WPI as an indicator, “we cannot neglect CPI also,” as it has been rising faster for long. WPI rose to seven-month high in September to 6.46 per cent while CPI hovering at 9.84 per cent in the same month.
“We haven’t changed the goalpost as far as WPI is concerned, but we also need to bring CPI under control for we can’t live with close to double-digit CPI for an extended period of time. So, our intention is also to bring the CPI within the boundary,” Rajan said. Admitting that recent spike in WPI was partly due to food inflation and also on exchange rate depreciation besides due to fuel prices, he said: “We need to bring it within the 5 per cent norm which we enunciated in the policy.” Rajan said the Reserve Bank wanted to bring down the CPI below 9 per cent level by March, 2014.