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Raghuram continues attack on inflation

As widely expected, he continued his anti-inflation focus with a 25-basis-point (bps) hike in the repo rate to 7.75 per cent and a 25-bps rise in reverse repo rate to 6.75 per cent. He also reduced the cost of short-term funds for banks by lowering the marginal standing facility (MSF) rate by 25 bps to 8.75 per cent.

However, Rajan sprang a surprise by raising the net demand and time liability (NDTL) — the banks’ borrowing limit against their cash positions - by 25 bps to 0.5 per cent for both 7-day and 14-day repos in order to increase short-term liquidity.

Explaining his strategy, the Chicago University Professor of Finance and former IMF Chief Economist said the steps taken ‘are 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 RBI will closely monitor inflation risk while being mindful of the evolving growth dynamics,’ he added.

However, Rajan assured at the post-policy press meet, ‘I don’t want to say in any way that RBI is going to become nutters on inflation.... For any reasonable central bank, while looking at achieving reasonable level of inflation, it also has to take into account the growth situation, because growth itself will create some dis-inflationary forces and therefore it means you can achieve the inflation target less of an interest rate hike.’
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