RBI Rajan Ups Repo by 0.25 percent to
7.5 percent to Contain Inflation, Tight Money Policy
Continues
[RBI Press Release dated 20th September
2013]
Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving macroeconomic
situation, it has been decided to:
·
reduce the marginal standing facility (MSF) rate by 75 basis points from
10.25 per cent to 9.5 per cent with immediate effect;
·
reduce the minimum daily maintenance of the cash reserve ratio (CRR) from
99 per cent of the requirement to 95 per cent effective from the fortnight
beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent;
and
·
increase the policy repo rate under the liquidity
adjustment facility (LAF) by 25 basis points from 7.25 per cent to 7.5 per cent
with immediate effect.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.5
per cent and the Bank Rate stands reduced to 9.5 per cent with immediate
effect. With these changes, the MSF rate and the Bank Rate are recalibrated to
200 basis points above the repo rate.
Assessment
2. Since the First Quarter Review
(FQR) in July, a weak recovery has been taking hold in advanced economies, with
growth picking up in Japan and the UK and the euro area exiting recession.
However, activity has slowed in several emerging economies, buffeted by
heightened financial market turbulence on the prospect of tapering of
quantitative easing (QE) in the US. The decision by the US Federal Reserve to
hold off tapering has buoyed financial markets but tapering is inevitable.
3. On the domestic front, growth has
weakened with continuing sluggishness in industrial activity and services. The
pace of infrastructure project completion is subdued and new project starts
remain muted. Consumption, while relatively firm so far, is starting to weaken
even in rural areas, with durable goods consumption hit hard. Consequently,
growth is trailing below potential and the output gap is widening. Some pick-up
is expected on account of the brightening prospects for agriculture due to kharifoutput and the upturn in exports. Also, 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.
4. WPI inflation, which had eased in
Q1 of 2013-14, has started rising again as the pass-through of fuel price
increases has been compounded by the sharp depreciation of the rupee and rising
international commodity prices. The negative output gap will exercise downward
pressure on inflation, and the process will be aided as supply side
constraints, especially relating to food and infrastructure, ease. However, 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. What is equally worrisome is that inflation at the retail level, measured
by the CPI, has been high for a number of years, entrenching inflation
expectations at elevated levels and eroding consumer and business confidence.
Although better prospects of a robust kharif harvest
will lead to some moderation in CPI inflation, there is no room for
complacency.
5. Turning to the external sector,
weakening domestic saving, subdued export demand and the rising value of oil
imports - most recently due to geopolitical risks emanating from the Middle
East - have led to a larger current account deficit (CAD). Concerns
about funding the CAD, amplified by capital outflows precipitated by
anticipated tapering of asset purchases by the US Federal Reserve, increased
volatility in the foreign exchange market. More recently, as these
concerns have been mitigated after steps taken by the Government and the
Reserve Bank to contain the CAD and improve the environment for external
financing, the focus has turned to internal determinants of the value of the
rupee, primarily the fiscal deficit and domestic inflation.
Policy Stance and Rationale
6. Since mid-July, the Reserve Bank
has put in place a number of exceptional measures to tighten liquidity with a
view to dampening volatility in the foreign exchange market. These measures
have raised the effective policy rate for monetary policy operations to 10.25
per cent, aligned to the re-calibrated MSF rate. The intent has been to
maintain tight liquidity conditions at the short end of the term structure
until the measures designed to alter the path of the CAD and improve prospects
for its stable funding take effect. As a number of these measures are now in
place and because the external environment has improved, it is now possible for
the Reserve Bank to contemplate easing these exceptional measures in a
calibrated manner. As a first step, therefore, the MSF rate is reduced by 75
basis points. Furthermore, the minimum daily maintenance of the CRR prescribed
by the Reserve Bank is brought down from 99 per cent of the requirement to 95
per cent. The timing and direction of further actions on exceptional measures
will be contingent upon exchange market stability, and can be two-way. Further
actions need not be announced only on policy dates. However, any further change
in the minimum daily maintenance of the CRR is not contemplated.
7. As the measures are unwound, the
objective is to normalise the conduct and operations of monetary policy so as
to allow the LAF repo rate to resume its role as the operational policy
interest rate. However, inflation is high and household financial saving is
lower than desirable. As the inflationary consequences of exchange rate
depreciation and hitherto suppressed inflation play out, they will offset some
of the disinflationary effects of a better harvest and the negative output gap.
The need to anchor inflation and inflation expectations has to be set against
the fragile state of the industrial sector and urban demand. Keeping
all this in view, bringing down inflation to more tolerable levels warrants
raising the LAF repo rate by 25 basis points immediately.
8. The Reserve Bank will closely and
continuously monitor the evolving growth-inflation dynamics with a readiness to
act pre-emptively, as necessary. The policy stance and measures set out in this
review begin the process of cautious unwinding of the exceptional measures,
which will restore normalcy to financial flows. They are also intended to
address inflationary pressures so as to provide a stable nominal anchor for the
economy, thereby mitigating exchange market pressures and creating a conducive environment for the revitalisation of sustainable
growth.
Ref: DBOD.No.Ret.BC. 56
/12.01.001/2013-14 dated 20th September 2013
Sub: Bank Rate
Please
refer to our Circular DBOD.No.Ret.BC.31/12.01.001/2013-14 dated July 15, 2013 on
the captioned subject. As announced in the Press Release 2013-2014/604 dated
September 20, 2013, the Bank Rate stands adjusted by 75 basis points from 10.25
per cent to 9.50 per cent with effect from September 20, 2013.
2. All penal interest rates on
shortfall in reserve requirements, which are specifically linked to the Bank
Rate, also stand revised as indicated in Annex.
Penal Interest Rates which are linked to the Bank
Rate |
||
Item |
Existing Rate |
Revised Rate |
Penal interest
rates on shortfalls in reserve requirements (depending on duration of
shortfalls). |
Bank Rate plus
3.0 percentage points (13.25 per cent) or Bank Rate plus 5.0 percentage
points (15.25 per cent). |
Bank Rate plus
3.0 percentage points (12.50 per cent) or Bank Rate plus 5.0 percentage
points (14.50 per cent). |