The repo rate, through which the central bank infuses liquidity into the banking system, was increased by 25 basis points to 7.75% on Friday.
MUMBAI: That’s a hat-trick of rate-hike shocks from the Reserve Bank of India in four months.
Just when talk of a repo rate hike by the central bank in its April monetary policy was gathering decibels, the RBI pulled the rug with its third surprise round of interest rate hikes.
The repo rate, through which the central bank infuses liquidity into the banking system, was increased by 25 basis points to 7.75% on Friday.
Along with it came the hammer — the cash reserve ratio was also hiked by 50 basis points (in two tranches - April 14 and April 28) to 6.50%, which impounds about Rs 15,500 crore of liquidity from the banking system.
Twisting the knife further, the RBI halved the interest rate it pays on CRR to 50 basis points (100 basis points make a percentage point or “1%” in colloquial terms) from the fortnight beginning April 14, 2007.
That it is deadly serious about this inflation fight comes through in its statement on Friday: “The stance of the monetary policy has progressively shifted to reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances.”
The inflation paranoia continues: “The conduct of monetary policy should continue to demonstrate that inflation beyond the tolerance threshold of RBI is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses,” the RBI said.
In short, there will be no toleration of any build-up in liquidity till such time inflation is brought under control, analyst said.
“This is a pre-emptive move ahead of government spending. They are clearly not comfortable with any build-up in liquidity,” said Abheek Barua, chief economist, ABN Amro Bank.
Expectations were that liquidity will improve in April after a tight monetary policy following advance tax outflows in the second half of March.
Mahendra Jajoo, who manages the equivalent of $1.2 billion of Indian debt at ABN Amro Asset Management Ltd in Mumbai, told Bloomberg Friday’s action leaves no room for anyone to think that the RBI is done with monetary tightening.
“This is going to have a strong psychological and physical impact on the bond market. The 10-year yield may rise by as much as 25 basis points after this.”
Treasurers agreed that the RBI will ensure very little room on the liquidity front from here.
“Now we will have to keep a close watch on inflation because the RBI is clearly reacting to it,” said Tarini Vaidya, country treasurer, Centurion Bank of Punjab.
“Worries are on rising global oil prices and increasing prices of local commodities like wheat,” Vaidya said.
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