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RBI raises policy rate by 0.25%, loans to be costlier

New Delhi: Reserve Bank Governor Raghuram Rajan on Tuesday again surprised the markets and raised the key policy rate by 0.25 per cent to 8 per cent in a bid to curb inflation, a move
India TV Business Desk January 28, 2014 12:57 IST
India TV Business Desk
New Delhi: Reserve Bank Governor Raghuram Rajan on Tuesday again surprised the markets and raised the key policy rate by 0.25 per cent to 8 per cent in a bid to curb inflation, a move that may translate into higher EMIs and push up the cost of borrowing for corporates.

"..an increase in the policy (repo) rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path,” Dr. Rajan said while unveiling the Third Quarter Review of Monetary Policy.

Consequently, the reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent.

However, the RBI kept the cash reserve ratio unchanged at 4 per cent as liquidity seems to be comfortable.

It was widely expected that Dr. Rajan would maintain the status quo on rates to support growth. Ahead of the quarterly review, Rajan had termed inflation a “destructive disease.”

The Governor said economic growth would be below 5 per cent in the current financial year and could accelerate in 2014-15 to a mean projection of 5.5 per cent.

In line with the Urjit Patel committee recommendations, monetary policy reviews will henceforth be undertaken every two months, consistent with the availability of key macroeconomic and financial data, Rajan said.

The RBI's baseline projections for retail inflation indicate that over the ensuing 12-month horizon, and with the current policy stance, there are upside risks to the central forecast of 8 per cent.

“The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture,” he said.

The repo rate hike is likely to have a bearing on interest rates and may push up the cost of funds for retail as well as corporate borrowers.

Highlights of the RBI's third quarter review of monetary policy

* Key lending rates hiked by 0.25 per cent to 8%

* Cash reserve ratio kept unchanged at 4%

* Marginal Standing Facility (MSF) rate stands at 9%

* GDP growth to be less than 5% in current fiscal

* Growth to improve to 5.5% in 2014-15

* Current Account Deficit to be below 2.5% this fiscal

* March-end inflation could exceed 8%

* Rate hike will set economy securely on disinflationary path

* Growth likely to lose momentum in Q3 of 2013-14.

* Slowdown in economy getting increasingly worrisome

* Inflation is a tax that is grossly inequitable, falling hardest on the very poor

* Fiscal and monetary authorities should continue to work for macroeconomic stabilisation

* Henceforth, policy review to take place every two months. Next review on April 1.