Bold Rajan raises repo rate: 10 Key points from policy review

FP Staff 12 mins ago


The RBI today increased its policy rate and eased its recently taken liquidity tightening steps, indicating clearly that its key concern is inflation and not growth.

 Here are the 10  key takeaways from the RBI’s action 

1. Reduced the marginal standing facility (MSF) rate for banks by 75 basis points to 9.5 percent from 10.25 percent with immediate effect. 

2. Reduced the minimum daily maintenance of the cash reserve ratio (CRR) for banks 95 percent of the requirement from 99 percent, effective from the fortnight beginning 21 September. 

3. Keep CRR unchanged at 4 percent.

 4. Increases the policy repo rate, or policy rate, under the liquidity adjustment facility (LAF) by 25 basis points from 7.25 percent to 7.5 percent with immediate effect.

 5. With an improvement in the external environment, the RBI gets room to contemplate easing the recent exceptional tightening measures in a calibrated manner. 

The Reserve Bank of India logo. Reuters So the reduction in MSF rate and daily CRR requirement.

 6. The timing and direction of further actions on exceptional measures will be contingent upon exchange market stability, and can be two-way. 

7. The decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable.

 8. As infrastructure investments are expedited, and as projects cleared by the Cabinet Committee on Investment come on stream, growth could pick up in the second half of the year.

 9. The current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year. 

10. Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency. 11. Concerns over CAD have been mitigated after steps taken by the Government and the Reserve Bank. 

There is an improvement in the environment for external financing.

 The focus now is the fiscal deficit and domestic inflation, internal determinants of the value of the rupee.