Mumbai/New Delhi, Sep 21: Captains of Indian industry have welcomed Reserve Bank of India (RBI) Governor Raghuram Rajan’s decision to hike the Repo rate and keep CRR unchanged while announcing his maiden policy review.
Rajan raised the Repo rate by 25 basis points (bps) to 7.50 percent, defying widespread forecasts that he would leave the rate on hold to bolster a sluggish economy, and as expected struck a hawkish tone.
Reacting to the move, the vice-president of Federation of Indian Chambers of Commerce and Industry (FICCI), Sidharth Birla, said: “I think, first of all, we are happy to see a positive stance, overall in terms of emotions by Mr. Rajan. Certainly, we expected more, and the expectation of the industry was that the repo rate would go down and measures would be taken to provide more liquidity to the industry, really speaking bringing about a change in sentiment.”
“So, to that, I would say that we are partially disappointed, but I think he has very clearly enumerated a number of reasons as to why he has done, what he has done,” Birla added.
Meanwhile, market experts in Mumbai said that it would be interesting to see whether banks increase lending rates, as the cost of funds would come down for the banks.
“He (Reserve Bank of India Governor Raghuram Rajan), contrary to the belief, he increased so the market has again gone wrong. They were expecting the rates to be reduced, or if not reduced, status quo and some levy in CRR (cash reserve ratio). Here he has given some levy to CRR, an overnight rate but it is not much. But one thing is there, cost of funds will come down for the banks so one has to see whether the banks are increasing the lending rate or not,” said market expert Sunil Shah in Mumbai.
Earlier in the day, the RBI partially scaled back the minimum cash balance requirement banks must keep with the central bank on a daily basis.
Headline inflation shot to a six-month high of 6.1 percent in August, hardening the case for Rajan to keep interest rates high.
India’s record-high current account deficit made it especially vulnerable to the flight of funds from emerging markets that began in May on expectations the Fed would soon begin tapering its extraordinary stimulus.
Since Raghuram Rajan took office, the rupee had recovered more than 9 percent through Thursday, getting a further boost this week after the US Federal Reserve unexpectedly opted not to begin scaling back its stimulus programme.
Commenting on these developments, Rajan had said that domestic drivers of the rupee now take precedence. (ANI)