India Monetary Policy Review – October 2013

At its Quarterly Monetary policy review on the 29th of October, the Reserve Bank of India (RBI) raised the Repo rate by 25bp to 7.75%. It simultaneously cut the MSF (Marginal Standing Facility Rate) by 25bp to 8%; this follows a prior 50bp cut on the 7th October.

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  • At its Quarterly Monetary policy review on the 29th of October, the Reserve Bank of India (RBI) raised the Repo rate by 25bp to 7.75%.
  • It simultaneously cut the MSF (Marginal Standing Facility Rate) by 25bp to 8%; this follows a prior 50bp cut on the 7th October.  The interest rate corridor has now been tightened to 100bp.
  • The decision reflects an increasing focus on anchoring inflationary expectations, boosting financial savings while easing liquidity, amid an improved external backdrop.
  • Following the RBI decision, State Bank of India and HDFC raised their minimum lending rate by 20bp.
  • The RBI discussed a number of issues and issued guidelines about how foreign banks could expand their footprint in India by converting to Wholly Owned Subsidiaries.
  • The Indian economy remains weak, although the performance of the Infrastructure Industries has been positive during the September.
  • The trade figures are encouraging and supportive of an improved Current Account position. Concerns about financing the Current Account have receded considerably, with an estimated USD12.1bn of inflows from the Concessional Foreign Currency Non Resident Swap Facility and the increasing flexibility accorded to banks to secure overseas funding.
  • Inflationary pressures have risen, with the Wholesale Price Index rising due to rising food and elevated fuel prices. The Consumer Price Index too remains uncomfortably high, reflecting high Service prices.
  • NAB Economics is forecasting a further 25bp rise, which should see the Repo rate end the 2013-14 financial year at 8%. This balances high inflation, long lead times in monetary policy and a weak economic environment.

For further analysis download the full report.