Dr Rajan prefers anti-inflation pill to growth stimulant
30 Oct 2013 11:40 PM GMT
Inflation worries forced the Reserve Bank of India (RBI) at its second quarter review of monetary policy to continue its firm stance and hike the short-term lending (repo) rate by 0.25 per cent, a step that will make corporate and consumer loans more expensive.
There was no surprise in the first full policy unveiled by new the RBI governor Raghuram Rajan, who increased the repo rate, as was widely expected, by 0.25 per cent to 7.75 per cent and brought down the cost of short-term funds for banks by slashing the marginal standing facility (MSF) rate by a similar quantum to 8.75 per cent. The policy stance and measures, Rajan said, '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 Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics,' he said on Tuesday while announcing the policy rate.
The central bank reduced the growth forecast for the current fiscal to 5 per cent from 5.5 per cent projected earlier. Economic growth fell to a decade-low of 5 per cent in the previous financial year.
The RBI left other rates unchanged, such as the cash reserve ratio at 4 per cent, and mandatory holdings in government securities and other liquid assets as a solvency measure (SLR) at 23 per cent. However, the governor doubled the borrowing limit of banks against their cash positions or NDTL to 0.5 per cent for both 7-day and 14-day repos, with immediate effect, to increase liquidity in the system.
With these changes, the RBI has calibrated the window between the repo rate (7.75 per cent) and MSF (8.75 per cent) to 100 basis points, as stated in the 20 September mid-quarter review. Accordingly, the bank rate is reduced to 8.75 per cent with immediate effect. Consequently, the reverse repo rate is adjusted upward to 6.75 per cent. This is the second lending rate hike since Rajan took over on 4 September. While he has increased the lending (repo) rate by 0.50 per cent, he also brought down the MSF rate, or emergency fund borrowing window for banks, by a steeper 1.5 per cent. Pegging retail inflation as the biggest threat on the price index front, the RBI said it would remain elevated at over 9 per cent, while wholesale inflation will edge up in the remaining quarters of the year with the pass-through effects of the rupee's depreciation and fuel and food inflation. Wholesale price index (WPI) inflation is ruling above the Reserve Bank's comfort levels, it said, adding that the persistence of high consumer price index (CPI) inflation remains a concern.
'The good monsoon should have a salutary effect on food inflation, but second-round effects from already high food and fuel inflation could impart upside pressures on prices of other commodities and services,' it said.
Giving guidance, Rajan said monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence.
'It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices,' he said.
With the normalisation of exceptional liquidity measures under way, incremental calibration of monetary policy will be shaped by changes in the growth-inflation balance, keeping overall macroeconomic stability in consideration, he said.
To support growth, he said, 'complementary action aimed at productivity enhancement, structural reforms and quick project implementation will be needed.'
There was no surprise in the first full policy unveiled by new the RBI governor Raghuram Rajan, who increased the repo rate, as was widely expected, by 0.25 per cent to 7.75 per cent and brought down the cost of short-term funds for banks by slashing the marginal standing facility (MSF) rate by a similar quantum to 8.75 per cent. The policy stance and measures, Rajan said, '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 Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics,' he said on Tuesday while announcing the policy rate.
The central bank reduced the growth forecast for the current fiscal to 5 per cent from 5.5 per cent projected earlier. Economic growth fell to a decade-low of 5 per cent in the previous financial year.
The RBI left other rates unchanged, such as the cash reserve ratio at 4 per cent, and mandatory holdings in government securities and other liquid assets as a solvency measure (SLR) at 23 per cent. However, the governor doubled the borrowing limit of banks against their cash positions or NDTL to 0.5 per cent for both 7-day and 14-day repos, with immediate effect, to increase liquidity in the system.
With these changes, the RBI has calibrated the window between the repo rate (7.75 per cent) and MSF (8.75 per cent) to 100 basis points, as stated in the 20 September mid-quarter review. Accordingly, the bank rate is reduced to 8.75 per cent with immediate effect. Consequently, the reverse repo rate is adjusted upward to 6.75 per cent. This is the second lending rate hike since Rajan took over on 4 September. While he has increased the lending (repo) rate by 0.50 per cent, he also brought down the MSF rate, or emergency fund borrowing window for banks, by a steeper 1.5 per cent. Pegging retail inflation as the biggest threat on the price index front, the RBI said it would remain elevated at over 9 per cent, while wholesale inflation will edge up in the remaining quarters of the year with the pass-through effects of the rupee's depreciation and fuel and food inflation. Wholesale price index (WPI) inflation is ruling above the Reserve Bank's comfort levels, it said, adding that the persistence of high consumer price index (CPI) inflation remains a concern.
'The good monsoon should have a salutary effect on food inflation, but second-round effects from already high food and fuel inflation could impart upside pressures on prices of other commodities and services,' it said.
Giving guidance, Rajan said monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence.
'It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices,' he said.
With the normalisation of exceptional liquidity measures under way, incremental calibration of monetary policy will be shaped by changes in the growth-inflation balance, keeping overall macroeconomic stability in consideration, he said.
To support growth, he said, 'complementary action aimed at productivity enhancement, structural reforms and quick project implementation will be needed.'
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