RBI increased the policy repo rate by 25 basis points

In a surprise move today, RBI has increased its policy repo rate or interest rate by 25 basis points and keeps the cash reserve ratio of schedule bank unchanged to 4%.

Due to this change, the repo rate that bank pays when they borrow money from RBI has been increased from 7.75 % to 8 % per annum. Reverse repo rate at which RBI pays to bank for keeping their surplus money has been adjusted to 7%. 

In its third quarter monetary review policy, RBI said growth is expected to fall below 5% in 2013-2014 due to slow down in manufacturing sector and is likely to increase to the range of 5 % to 6% in next fiscal year i.e. 2014-2015.

RBI increased the policy repo rate by 25 basis pointsRBI also said that further tightening is unlikely if consumer price inflation eases. Before this change a majority of financial gurus have predicted a status-quo in the repo rate.

Following the recommendation of the Dr. Urjit Patel Committee, RBI has decided to review its monetary policy in a two-monthly cycle. The next monetary policy review is scheduled on Tuesday, April 1, 2014.

In its third quarter monetary review policy, RBI has also addressed risks to the inflation. RBI said “While retail inflation measured by the consumer price index (CPI) declined significantly on account of the anticipated disinflation in vegetable and fruit prices, it remains elevated at close to double digits. Moreover, inflation excluding food and fuel has also been high, especially in respect of services, indicative of wage pressures and other second round effects. In terms of the wholesale price index (WPI), headline inflation eased to a four-month low with the sharp decline in vegetable and fruit prices. Non-food manufactured products (NFMP) inflation, however, rose in December on an uptick in prices of chemicals, non-metallic minerals and paper products. Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation. It is critical to address these risks to the inflation outlook resolutely in order to stabilise and anchor inflation expectations, even while recognising the economy is weak and substantial fiscal tightening is likely in Q4.  ”

During the tenure of Raghuram Rajan, RBI has hiked the repo rate 3 times to fight inflation. Due to this hike in repo rates, banks are likely to increase their base rate interest to pass on the burden to their customer by which home loan and other EMIs will be increased.

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