RBI policy review: 'Worried' Raghuram Rajan pulls surprise, raises repo rate 25 bps, CRR left unchanged

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Raghuram Rajan's RBI raised its policy repo rate by 25 basis points to 8.00 percent. (PTI) Raghuram Rajan's RBI raised its policy repo rate by 25 basis points to 8.00 percent. (PTI)
SummaryRBI policy review: Governor Raghuram Rajan announces repo rate hike, hits markets.

CPI to 8 percent by January 2015 and 6 percent by January 2016.

"An increase in the policy rate ... will set the economy securely on the recommended disinflationary path," the RBI said in a brief policy statement.

"If the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture," it said.

The wholesale price index, long the RBI's main price barometer, slowed to 6.16 percent in December.

"It seems like RBI has implicitly accepted the (panel) recommendations implying continued focus on CPI going ahead," said Upasna Bhardwaj, economist at ING Vysya Bank, referring to the central bank panel on revamping monetary policy.

Rajan faces the daunting challenge of reviving an economy growing at a decade low of around 5 percent while battling persistently rising prices, much of which has been fuelled by supply-side shortages beyond the control of monetary policy.

The RBI said CPI inflation is likely to stay above 9 percent during the final quarter of the fiscal year that ends in March, ranging between 7.5 percent and 8.5 percent for the quarter that ends in March 2015, "with the balance of risks tilted on the upside."

It also said Indian economic growth is likely to fall short of its earlier projection of 5 percent this fiscal year, improving to 5-6 percent in the year that starts in April.

CRISIL: Repo rate at 8% to lower CPI inflation to 8%

In an unanticipated move, the Reserve Bank of India (RBI) in its third-quarter review of the monetary policy hiked the repo rate to 8.0%. The RBI indicated that the move was necessary to bring down CPI inflation to 8% by January 2015, as recommended recently by the Urjit Patel Committee. RBI’s emphasis on bringing down CPI inflation further to 6% over the next 24 months, suggests limited downside to interest rates in the coming months.

With this policy, the RBI has clearly shifted its focus towards achieving a stated inflation goal over the next couple of years. The future course of monetary policy will now be determined by the forecasts of CPI inflation, the new nominal anchor. We expect CPI inflation to average 8.5% during 2014-15.

COMMENTARY

KSR Anjaneyulu, MD & CEO, Lakshmi Vilas Bank:

Notwithstanding the fact that Agriculture production during this year expected to be very robust, there is no alternative for RBI except to raise Repo rate to contain inflation caused by CPI Index

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