Inflation worry led RBI to hike rates: Experts

It is now possible to contemplate easing exceptional cash tightening measures in a calibrated manner, the Reserve Bank of India said in its policy review on Friday.

In his first monetary policy review since taking office on September 4, RBI Governor Raghuram Rajan increased the repo rate by 25 basis points to 7.50 per cent.

Economists had widely expected the RBI to leave the repo rate unchanged. This is what experts have to say:

Rupa Rege Nitsure, Chief Economist, Bank Of Baroda, Mumbai

"RBI has done excellent caliberation today to bring India on par with other emerging market economies which have already raised policy rates. It is a clear and transparent signal. Also by easing short-term rates and liquidity, it has reduced the stresses on the shorter-end of the yield curve. It should be noted that this easing is partial so as to avoid a possible speculative response."
    
Shakti satapathy, fixed income strategist, AK capital, Mumbai:

"Today's stance carries the legacy of managing the inflationary pressure to support a sustainable growth trajectory in the medium term. The rise in repo though was not anticipated, the near term objective to restore rupee stability and an expected early wind up in the exceptional measures to lower down the current operating rate makes the case an appropriate fit.

"Looking at the tone of the policy, the chances of a repo cut look less likely on October 2013 policy unless certain CAD managing measures don't take place in the interim with improved funding stability."

Anubhuti Sahay, Economist, Standard Chartered, Mumbai

"The statement clearly has a strong hawkish bias as it states that with a relatively more stable exchange rate, monetary policy formulation will be determined once again by internal determinants viz inflation and fiscal deficit.

"The hike in repo rate has partially dented the positive impact of the reduction in MSF rate by 75 bps and relaxation in CRR maintenance requirement."

Radhika Rao, Economist, Dbs, Singapore

"This is possibly the part where the new RBI Governor pre-empted that the course of action by the central bank was not to accumulate 'likes'. Stress on the need to anchor inflation and inflationary expectations signals that price stability is still the central bank's main policy objective, even at the cost of short-term hurt to the growth outlook.

"This also signals that the current rupee levels are still out of their comfort zone and liquidity conditions will be kept tight until the currency stabilizes further. To some extent, the delay in the US Fed tapering decision perhaps emboldened the central bank to pursue with the corrective action required, especially as the withdrawal of the excess global stimulus is inevitable."

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Arvind chari, Fixed Income Fund Manager, Quantum Asset Management, Mumbai

"Good move to hike the repo (rate) and making clear his intent towards  maintaining price stability and restoring confidence on the exchange rate. It is commendable that he has done it in the background of a weak growth.

"The fact that QE tapering is inevitable, which gives no room for complacency and needs pro-active moves to counter its impact. We expect calibrated reduction in the spread/corridor as repo would be hiked further and MSF can be moved down as the INR settles."

Anjali Verma, chief economist, Phillipcapital, Mumbai

Hiking the repo rate was unexpected.

The governor is clearly worried about inflation.

He is saying the improved international conditions will take care of the current account deficit funding and his focus will shift to fiscal deficit and inflation, which were taking a backseat.

Upasana Bhardwaj, economist, ING Vysya Bank, Mumbai

"While partial rollbacks of the exceptional measures were expected, RBI clearly has highlighted the need to anchor inflationary expectations by raising the repo rate.

“We expect inflationary concerns to continue to remain the dominant factor driving the trajectory for repo rate going ahead."