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RBI raises repo rate; holds CRR

29 Oct 2013

October 29: The Reserve Bank of India raised its key policy rate, for the second time in as many months, in a bid to tame inflation that has been high and sticky for several months.

Despite the risks to an already sluggish economy, the central bank increased the repo rate - the rate at which it lends to commercial banks - from 7.5% to 7.75%.
"It's important to curb inflation and inflationary expectations. This will help create an environment of growth," new RBI chief Raghuram Rajan, a high-profile former chief economist at the International Monetary Fund, said.
The hike was in line with what most analysts and experts had predicted and the markets reacted positively as Rajan left the cash reserve ratio (CRR) — the percentage of deposits banks must hold in cash with the central bank — unchanged at 4%.

The rupee strengthened and bonds gained. The rupee had risen to 61.52 per dollar from around 61.63 before the RBI decision.

The rupee had slumped to record lows in August, at one point sliding some 20% for the year, on concerns about the country's gaping current account and fiscal deficits, and as global investors dumped emerging market assets for fear the US Federal Reserve was set to start tapering its massive stimulus programme.

Rajan, who took office in early September, had stunned markets in his first policy review just weeks later by raising interest rates to combat fierce price pressures dogging Asia's third-largest economy.

Most economists had predicted a hike by Rajan, as wholesale inflation has been above the RBI's comfort zone of 5% for four successive months.

India's annual inflation jumped to a seven-month-high of 6.46% for the month of September, led by surging food and fuel prices.

For Indian consumers, it is a double-whammy as they battle rising inflation squeezing their real income, while higher interest rates leave them with bigger EMIs on home loans and less to save or spend on other things.

Annual food inflation accelerated to 18.4% in September, its highest since mid-2010, pushed up by prices of vegetables, including onions, and stirring public discontent ahead of the national elections which must be held by next May.

In this challenging scenario, Reserve Bank-sponsored professional forecasters had scaled down India's growth projection to 4.8% for the current fiscal from 5.7% estimated earlier.