The repo rate is the rate at which banks borrow overnight money from RBI against government securities.
The Reserve Bank of India (RBI) on Tuesday hiked the repo rate by 25 basis points to 7.75% in the second quarter monetary policy review in order to contain inflation and anchor inflationary expectations.
The repo rate is the rate at which banks borrow overnight money from RBI against government securities. This is the second rate hike in second consecutive month. RBI had increased repo rate by 25bps to 7.5% in the mid-quarter review on September 20.
RBI said that it was important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth. While the consumer price inflation has been hovering close to double digits, rising food and fuel prices have pushed overall wholesale price inflation too.
“Curbing mounting inflationary pressures and managing inflation expectations will help strengthen the environment for growth by fostering macroeconomic and financial stability,” said RBI Governor Raghuram Rajan. The central bank expects both wholesale and consumer price inflation to remain elevated in the coming months.
At the same time, India’s central bank took steps to ease liquidity conditions by reducing the Marginal Standing Facility (MSF) rate by 25 basis points to 8.75% thereby restoring the corridor at 100 basis points.
Also, RBI increased the accessibility of funds under 7-days and 14-days term repo windows from 0.25% to 0.5% of net demand and time liabilities. Going forward, however, RBI urged banks to step up efforts to mobilize deposits.
The cash reserve ratio was kept unchanged at 4%.
In order to help banks manage liquidity on a daily basis, the RBI pushed the timings of the MSF operations to between 7.00 pm and 7.30 pm instead of between 4.45 pm and 5.15 pm.
RBI said that growth in India’s gross domestic product (GDP) could pick up by the end of the current financial year to 5% from 4.4% seen in the first quarter on the back of stronger exports, pick-up in agriculture and faster project clearances.
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