RBI hikes repo rate to 7.5%, reduces MSF rate to 9.5%

NEW DELHI: In his first monetary policy review after taking over as the Reserve Bank of India (RBI) governor, Raghuram Rajan on Friday reduced the MSF rate by 75 basis points to 9.5%. While reducing MSF, Rajan hiked repo rate to 7.5%.

The central bank kept the Cash Reserve Ratio ( CRR) unchanged. Rajan took over as governor on September 4. Local market sentiment improved dramatically after the Fed announcement and expectations are high that RBI will take measures to ensure the smoother flow of liquidity to make money supply available for productive purposes.

Ahead of the monetary policy review, the Finance Ministry expressed the hope that Reserve Bank will focus on promoting growth.

"Government's objective is to incentivise growth...growth is something that the government will hope for. But ultimately this is the decision that the Governor will take, considering the macroeconomic situation," Economic Affairs Secretary Arvind Mayaram said.

So far, RBI's stance has been to anchor inflationary expectations, prompting the industry to persistently clamour for rate cuts to promote investment and revive growth.

Economic growth hit a decade low of 5 per cent last fiscal while it grew at its slowest pace in four years at just 4.4 per cent in the first quarter of the current fiscal.

In its last policy review in July, the RBI chose to keep all key interest rates unchanged on account of a weak rupee.

Accordingly, the repo rate or the rate at which RBI lends to the system, has been retained at 7.25 per cent and the cash reserve ratio (CRR), the amount of deposits banks park with RBI, has been kept unchanged at 4 per cent.
               By
Shah Mohammad Abdul Qadir
            PGDM-I