Credit Policy: RBI hikes repo rate by 25 bps to 8%

The street had predicted status quo on the basis of slightly softer inflation in December. Most of the banker and economists polled by CNBC-TV18 do not expect any change in interest rates for the rest of fiscal year 2014.In its third quarter review of monetary policy, the Reserve Bank of India (RBI) hiked repo rate by 25 basis points to 8 percent, entirely reversing street expectations of a status quo. The move, which caught the market off guard, actually reflects the RBI's much-anticipated shift towards CPI-based policymaking, in keeping with Uijit Committee recommendations.

 Consequently, the reverse repo rate under the LAF stands adjusted at 7 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 9 percent. 

Although the extent and direction of further policy steps are said to be data dependent, the RBI assured a pause in its tightening stance if the disinflationary process evolves according to its baseline projection. The Patel panel has set an objective to bring CPI down below 8 percent by January 2015, and sub 6 percent by January 2016. 

The central bank governor Raghuram Rajan's inflation targetted-policy states that the increase in policy rate has been undertaken to tame the retail inflation, which remains elevated at close to double digits. However, inflation, measured both by the wholesale price index (WPI) and the consumer price index (CPI) moderated to 6.2 percent and 9.8 percent respectively in December. Based on moderating inflation, the street has been expecting the RBI to keep rates unchanged. In its previous policy too, governor Rajan had left policy rate unchanged. Most of the banker and economists polled by CNBC-TV18 had ruled out any change in interest rates for the rest of fiscal year 2014. 

But Rajan maintained "only by bringing down inflation to a low and stable level that monetary policy can contribute to reviving consumption and investment in a sustainable way." He promised that if inflation eases at pace faster that what the apex bank anticiaptes and if the fall in prices can be sustained, then the Reserve Bank will have room to become more accommodative.

He said the so-called trade-off between inflation and growth is a false trade-off in the long run. 

Source: Moneycontrol Bureau