RBI Hikes Repo & Reverse Repo Rates

by Deepak Sharma 19. March 2010 20:00

RBI’s Press Release Extracts

 

“In the emergent scenario, low policy rates can complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in the prices of non-food manufactured goods.”

“As a part of the calibrated exit strategy, initiated in the Second Quarter Review in October 2009 and carried forward in the Third Quarter Review in January 2010, it has been decided:”

*              To raise the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 4.75 per cent to 5.0 per cent with immediate effect.

*              To raise the reverse repo rate under the LAF by 25 basis points from 3.25 per cent to 3.5 per cent with immediate effect.

These measures should anchor inflationary expectations and contain inflation going forward. As liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected. The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, and take further action as warranted.

 

The Cause

 

*              The developments on the inflation front, however, are a source of growing concern. Notwithstanding some moderation in recent weeks, food prices remain at elevated levels. In fact, consumer price inflation, as measured by various consumer price indices, has accentuated further. The acceleration in the prices of non-food manufactured goods and fuel items in recent months has been of particular concern,

*              The growing confidence in the economy and the risk of supply side inflation spilling over into a wider inflationary process,

*              Increasing capacity utilisation and rising commodity and energy prices are exerting pressure on overall inflation. Taken together, these factors heighten the risks of supply-side pressures translating into a generalised inflationary process,

 

 

The possible impact

 

*              Although, the markets were expecting an increase in rates from the regulator, the interim measure has given the participants a surprise,

*              The liquidity may remain comfortable, especially once the advance tax money collected by the govt, comes back in circulation, expected by the first fortnight of April,

*              Although bond markets were cheering the decline in food inflation numbers, published on Thursday, reflecting the decline in benchmark yields from 8%+ levels to the Friday close at 7.83%, coming Monday, can see again the increase on the benchmark yields by 10 to 15 basis points,

*              For coming days, it will be important to watch non-food inflation numbers and impact of this measure to estimate the further course of action by the regulator,

*              There may not be immediate impact on the debt borrowing rates for corporate for long term, depending on the overall macro scenario and regulator’s stance, expect a gradual increase in rates over the next financial year,

*              Shorter-end  interest rates for corporate for CP’s/ NCD’s expected to increase,

*              Stock markets too discounted the expected increase in the policy rates but this interim earlier than expected measure may make sentiments negative on Monday,

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