India: RBI raises key policy rate, continues to scale back emergency measures
October 29, 2013
At its 29 October monetary policy meeting, the Reserve Bank of India (RBI) decided to raise the repurchase rate by 25 basis points to 7.75%, a decision that most market analysts had expected. The move follows a similar increase at the previous meeting. In addition, the RBI decided to continue easing the emergency measures that have been in place since July, which were aimed at tightening cash conditions in order to curtail the rupee's fall. Accordingly, the RBI lowered the Marginal Standing Facility (MSF) rate by 25 basis points to 8.75%, which was in line with market expectations. The aim of this move - which follows a similar 25 basis-point cut on 7 October - is to reinstall the differential between the MSF rate and the repurchase rate to 100 points. In the 29 October meeting, the Bank also decided to maintain the cash reserve ratio (CRR) at 4.00%.
According to the RBI's statement, the global outlook has improved modestly, whereas growth in India remains sluggish. The Bank noted that industrial activity remains weak, reflecting, in part, tepid growth in consumption and investment. Conversely, the Bank acknowledged that both exports and the services sector are showing signs of improvement.
Regarding price developments, monetary authorities pointed out that WPI inflation remains elevated as the pass-through of the depreciation of the rupee is having an impact on the prices of manufactured goods, food and fuels. Concurrently, the Bank stated that CPI inflation also remains elevated, and thus inflation expectations will stay high through most of the rest of 2013.
The majority of FocusEconomics Forecast panelists have taken the recent developments into account. As a result, forecasters project an average forecast of 7.56% in the repurchase rate at the end of fiscal year 2013/2014.
Author: Ricardo Aceves, Senior Economist