RBI repo rate hike: Raghuram Rajan says RBI is 'anti-inflation'

Press Trust of India Posted online: Friday, Sep 20, 2013 at 0000 hrs
Mumbai : Asserting that the Reserve Bank of India (RBI) is "anti-inflation", new Governor Raghuram Rajan today said partial easing of its recent liquidity tightening measures coupled with repo rate hike is supportive of economic growth, a remark that helped the markets trim losses.

"Of course, we are anti-inflation... of course, our intent is to signal a stance against inflation," Raghuram Rajan said at a press conference after announcing his first policy review as the RBI Governor.

Raghuram Rajan wants to be India's Paul Volcker

The RBI wants to get inflation down to the stated 5 per cent-mark, Raghuram Rajan said without giving a deadline for the same.

Raghuram Rajan, a celebrated economist credited for predicting the 2008 global financial crisis, said the central bank is worried about the growth aspect as well, even though he today increased the repo rate by 25 basis points to 7.50 per cent with immediate effect.

"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 said.

While the stock markets were rattled by the unexpected move to hike repo rate with BSE Sensex tanking nearly 600 points intra-day, the market recovered some ground to end with a loss of 383 points after Raghuram Rajan's comments in the conference.

Also, the rupee, which fell to 62.6 level, ended at 62.23 versus the dollar today.

Markets had pinned hopes on Raghuram Rajan to revive growth by cutting rates. The Sensex had vaulted over 10.5 per cent and rupee jumped over 12 per cent since September 4 when Raghuram Rajan assumed office.

Drawing attention to his decision to reduce marginal standing facility rate by 0.75 per cent to 9.5, he said the repo rate hike has to be looked in this context as well.

"It (repo hike) is clubbed with a substantial reduction in the MSF, which is growth positive. Analysts, when they look at this, should weigh the measures together rather than seeing it as a unilateral issue," the Governor said.

Without giving a timeline, Raghuram Rajan said the gap between the repo rate and the MSF will be narrowed down to 100 basis points, which will signal a shift back to the normal process of monetary policy wherein the repo is the operational rate.

One basis point is equal to 0.01 per cent.

Raghuram Rajan said he expected banks to pass on the reduction in cost of funds to the borrowers by setting their rates "appropriate to the cost of funds", a move that can help drive investment.

"The intent of the policy today is primarily to say the cost of funding is very high; we need to withdraw these liquidity (tightening) measures as soon as the markets allow it...immediately there will be a reduction in the cost of funding to the financial sector," the RBI Governor said.

However, bankers did not buy his argument for repo rate hike and said lending and deposit rates will have to rise.

SBI Chairman Pratip Chaudhuri said: "Now that the busy season has started, there is a huge credit demand and banks are scrambling for deposits. Deposit rate, I think, will go up and accordingly lending rates can also go up."

However, Chaudhuri, who raised his base rate by 10 bps yesterday, ruled out a hike in base rate.

In July, RBI had resorted to a slew of unconventional liquidity tightening measures like increasing the MSF rate by 300 basis points and asking banks to maintain CRR at 99 per cent, to arrest the steep fall in the rupee.

The local currency has been under sustained pressure ever since the US Federal Reserve chief Ben Bernanke hinted at withdrawing its stimulus on May 22.

The RBI had postponed its mid-quarter review by two days because of the Wednesday meet of the US Fed, which decided to continue with its easy money policy for now.

On the possible tapering US economic stimulus, Raghuram Rajan said: "We should not be complacent in the event of the US tapering and should emerge stronger to take on the tapering, whenever it comes."

"It is going to come back and what we need to do is put our house in order before it comes back....of course we'd have to prepare once again but this time, we will be in a much better position, much stronger position and we won't have to worry that much," he said.

On other measures taken in the run up to the policy, the RBI chief said a lot has been made of the cash reserve ratio (CRR) move of asking banks to hold an average of 99 per cent balances, as they have held even 102 per cent in the past.

The decision to ask oil marketeers to come to the RBI for their dollar requirements is not a permanent measure and will be liberalised as stability returns in the market, Rajan said, refusing to be drawn into defining stability.

He rejected the criticism of ushering in 'capital controls' when the RBI reduced the amount of money an individual can take out and added that it will be liberalised once calm returns to the market.

"It was a precautionary measure and the next time the money starts flowing in again, we will liberalise."

Rajan said banks have attracted over USD 1.4 billion in deposits over the last fortnight and hoped current account deficit will be financed without drawing down too much from the forex reserves.

Asked if RBI will shift focus on the retail inflation numbers, Rajan said both retail as well as wholesale price indices are important and suggested to wait for the report of the Urijit Patel Committee on monetary policy.