Rajan’s target: Reining in inflation Asserting that RBI is “anti-inflation”, new Governor Raghuram Rajan (in pic) said partial easing of its recent liquidity tightening measures coupled with repo rate hike is supportive of growth The RBI wants to get inflation down to the stated 5 per cent-mark, he said, but did not set a deadline Retail inflation was at 9.52% last month. Wholesale price inflation rose to a six-month high of 6.1% in August, driven by costlier food items Stating that the central bank is worried about the growth aspect as well, he said sometimes the knowledge that inflation will be lower can actually enhance growth prospects rather Of course, we are anti-inflation... of course, our intent is to signal a stance against inflation. — Raghuram Rajan, RBI Governor

Mumbai, September 20
Indicating that he would continue his predecessor's fight against inflation, Reserve Bank of India Governor Raghuram Rajan unexpectedly raised the repo rate (short-term lending rate) by 25 basis points in his maiden policy review unveiled on Friday. With this, your EMIs on auto, home and other loans are set to go up.

Within minutes of the policy announcement, the markets tanked by as much as 595 points and the rupee depreciated to 62.46 against the dollar before recovering a bit at 62.23, the most in three weeks. Investors, who were expecting an easier monetary policy, sold off stocks.

The industry, too, gave a thumbs-down to the policy review, expressing “surprise” over the increase in repo rate and said a rate cut would have helped improve the sentiment. Contrary to the expectations of the industry and experts, Rajan opted for a hawkish monetary stance ahead of the festive season instead of shifting the focus to growth promotion by lowering interest rates to generate demand.

The repo rate (the rate at which the RBI lends short-term money to banks) has been increased by 25 basis points to 7.5% from 7.25% with immediate effect. Following the announcement, the reverse repo (the rate at which banks park their short-term excess liquidity with the RBI) and bank rates stand adjusted to 6.5% and 9.5%, respectively. The RBI had last raised the repo rate in October 2011 by 0.25% to 8.5%.

The RBI Governor, however, took steps to ease liquidity. Acceding to recent demands by bankers, the RBI reduced the marginal standing facility (MSF) rate, the rate at which banks borrow from the RBI, by 75 basis points from 10.25 per cent to 9.5 percent and lowered the minimum daily maintenance of the cash reserve ratio (CRR) from 99% to 95% of the requirement, effective from the fortnight beginning September 21.

After the policy was unveiled, State Bank of India chairman Pratip Chaudhuri said lending and deposit rates will go up in view of the rise in festive season demand. He said deposit rates would be hiked followed by lending rates.

Rajan, however, did not indicate that banks would raise lending rates, saying the cut in the MSF rate would balance the impact of the repo rate hike. "I hope that they (banks) will look at their cost of funding...to make a decision and not look at the future and try and anticipate some hypothetical cost," he added.

The central bank noted that inflation, which showed signs of moderating in the first quarter of the current financial year, had begun to rise again because of increases in fuel prices and rising commodity prices.

Retail inflation was at 9.52 per cent last month. Wholesale price inflation rose to a six-month high of 6.1 per cent in August, driven by costlier food items.

"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," the RBI said. Later, speaking to reporters, Rajan said the central bank continued to be anti-inflation. "Of course, we are anti-inflation... Our intent is to signal a stance against inflation," he said. However, he said the easing of the recent liquidity tightening measures would help growth.

The repo rate hike "clubbed with a substantial reduction in the MSF is growth positive. Analysts, when they look at this, should weigh the measures together rather than seeing it as a unilateral issue," Rajan said. The governor went on to say that the central bank's target was to control inflation at 5 per cent, though he refused to give a deadline for the same. "We have to be very careful about immediately associating our repo rate hike to growth implications. Sometimes, the knowledge that inflation will be lower can actually enhance growth prospects rather than reduce growth prospects," he added.

CII Director General Chandrajit Banerjee said the repo rate hike could have been avoided as the industry is already reeling under pressures of high cost of capital and low availability in a tight liquidity situation. "The increase in repo rate comes as a surprise," he said.