RBI surprises again; hikes repo rate as inflation threat looms

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RBI surprises again; hikes repo rate as inflation threat looms
Stunning markets once again, the Reserve Bank of India (RBI) today belied expectations once again by hiking repo rates (rates at which it lends to banks) by 0.25 basis points to 8 per cent. 

Today's decision was following worries over elevated levels of inflation and despite lower than expected inflation data for December, which saw WPI Inflation falling to a surprisingly low rate of 6.16 per cent.

Consumer price inflation also fell sharply to 9.87 per cent in December, as against 11.24 per cent in the month of December, which was ignored by the RBI, while hiking rates today.

The country's central bank kept the CRR rates unchanged at 4 per cent. Consequently, the reverse repo rate under the LAF stands adjusted at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

Speaking after the RBI decision, RBI Governor Raghuram Rajan said that upside risks to inflation remain. 

"While retail inflation measured by the consumer price index (CPI) declined significantly on account of the anticipated disinflation in vegetable and fruit prices, it remains elevated at close to double digits. Moreover, inflation excluding food and fuel has also been high, especially in respect of services, indicative of wage pressures and other second round effects. In terms of the wholesale price index (WPI), headline inflation eased to a four-month low with the sharp decline in vegetable and fruit prices. Non-food manufactured products (NFMP) inflation, however, rose in December on an uptick in prices of chemicals, non-metallic minerals and paper products. Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation. It is critical to address these risks to the inflation outlook resolutely in order to stabilise and anchor inflation expectations, even while recognising the economy is weak and substantial fiscal tightening is likely in Q4," the RBI said in a release. 

"In the Mid-Quarter Review on December 18, 2013, the policy decision was to wait for more data before acting. With the subsequent substantial fall in food prices, especially of vegetables, headline inflation has fallen significantly. Some of these effects will continue into the next round of data readings. CPI inflation excluding food and fuel has, however, remained flat and WPI inflation excluding food and fuel has risen," the country's central bank said. 

GoodReturns.in

Story first published: Tuesday, January 28, 2014, 10:52 [IST]
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