Monetary Policy: RBI may hike repo rates again

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Monetary Policy: RBI may hike repo rates again
The Reserve Bank of India will declare its Monetary Policy Review once again on October 29, against the backdrop of a stable rupee, elevated inflation and slowing growth.

Most economists and analysts recently polled in the media believe that the Reserve Bank of India will hike the repo rate for a second time in succession by 25 basis points.

In September, the RBI took the markets by surprise by hiking the repo rates (rates at which RBI lends to banks), while reducing the Marginal Standing Facility by 25 basis points.

Marginal Standing Facility is a window that allows scheduled commercial banks to borrow overnight from the central bank at a maximum amount of 1% of total time and demand liabilities.

The Reserve Bank of India may once again follow what it did in its September policy, by hiking the repo rate by 25 basis points, while cutting the marginal standing facility by 25 basis points.

Reasons for doing the same

The Reserve Bank of India would hike the repo rate by 25 basis points, in a bid to curb inflation. In September, the WPI Inflation was a nasty surprise hitting 6.46%, as against expectations of 6%. This is likely to leave the RBI with little choice but to hike repo rates.

Though, this may already have an impact on growth, the RBI has made its intentions very clear to fight inflation at the cost of growth.

On the other hand the RBI will cut the MSF, as this was increased in July largely to reduce liquidity and fight the battle against the falling rupee.

Economists believe that this may perhaps be the last hike in 2013 and there would perhaps be one more repo rate hike by the Reserve Bank in March. However, much would depend on how inflation behaves in the coming months.

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