India’s central bank has upped its campaign against inflation, raising rates by half a percentage point, twice previous rate rises. This is the first half point rate rise since 2008 (see chart).
The move comes despite “signs of moderating growth” in the economy, which shows how worried the Bank is about inflation. Strong consumer demand in the country has aggravated the global issue of rising commodity prices, adding to domestic inflationary pressures. That strong demand, in turn, has probably been encouraged by relatively low rates. Indeed, according to the Bank:
…demand has been strong enough to allow significant pass-through of input price increases. Importantly, this is happening even as there are visible signs of moderating growth, particularly in capital goods production and investment spending, suggesting that cumulative monetary actions are beginning to have an impact on demand [emphasis ours]
High and rising inflation has prompted a quarter point rate rise from the Reserve Bank of India, effective immediately. The move was largely expected. Both the repo and reverse repo rates are affected, now standing at 6.75 and 5.75 per cent, respectively.
Annual inflation rose to 8.31 per cent in February, against a target of 4-4.5 per cent. “The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” said the Bank in a statement. “Risks to inflation remain clearly on the upside.”
In addition to food and energy related price pressure, inflationary risks are heightened by growing demand. Read more
India’s Reserve Bank has raised rates to tackle inflation, while extending bank liquidity measures due to expire next week. The repo and reverse repo rates stand 25bp higher at 6.5 and 5.5 per cent, respectively, while easing measures are extended to April 8.
The rate rise was prompted by recent price rises. “Inflationary tendencies are clearly visible,” said governor Duvvuri Subbarao in the statement. “Inflation is the dominant concern… the reversal in [its] direction is striking.” The strength of his words make a 25bp rate rise seem insignificant.
But given global inflationary pressures from food and fuel, India’s December figure was not so dramatic. Viewed historically, annual wholesale price rises of 8.4 per cent still fit into the downward trend seen since April of last year, when inflation was running at 11 per cent. It is too early to say whether December’s figure is the start of a sharp increase in inflation – and today’s decision should make that a little less likely.
Despite the tightening measure, the RBI also announced today that it would alter and extend easing measures Read more
Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.
“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.
The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.
The second measure Read more
Temporary measures designed to ease a cash crunch in the banking sector over the weekend have been extended to run till Thursday. Additional liquidity will be provided to banks through an extra daily auction, since the Bank’s “liquidity adjustment facility window … has been in … deficit … recent[ly]“. Extra auctions were initially set for October 29, 30 and November 1. Now, auctions will also take place on November 2, 3 and 4.
Banks can also avail themselves of a temporary reduction in the statutory liquidity ratio: they will be allowed to hold 24 per cent rather than 25 per cent with the central bank. By one estimate, this small reduction is equivalent to an additional $10bn liquidity. Read more
India’s Bank rate, standing facilities and Liquidity Adjustment Facility – in short, the key tools the Bank uses to transmit its policy decisions to the real economy – are to be examined and compared with processes at major central banks by a special team at the RBI. Suggestions for changes are expected in three months’ time from the newly constituted Working Group on Operating Procedure of Monetary Policy, the Bank said.
The system of daily auctions, which absorb or inject liquidity – the Liquidity Adjustment Facility, or LAF – will come under particular scrutiny. Here there are no sacred cows: the group will examine the frequency and timing of auctions; the maturity period of the repos and reverse repos used to inject/absorb liquidity; and the size of the gap between the repo and reverse repo rates (the “corridor”). Indeed, the group should consider whether there should be a corridor at all. If so, it should consider whether its width be fixed or variable; and how to optimise its efficiency. Read more
The Reserve Bank of India has raised rates for the second consecutive month, but by less than some economists had forecast. The repo rate now stands at 5.25 per cent and the reverse repo is up to 3.75 per cent: both changes are immediate. The central bank has also increased the amount of cash its banks have to hold with the central bank, relative to deposits – its cash reserve ratio – by 25bp to 6 per cent. This will be effective April 24. The last rise was a month ago, a 25bp increase decided at an unscheduled meeting of the board. High inflation is the main motivation behind the rises.
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By James Lamont, South Asia Bureau chief
India’s central bank took steps on Friday to exit the loose monetary policy it adopted during the global financial crisis, as it tried to steady inflation expectations without hurting a quickening recovery. Read more
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By James Lamont, South Asia bureau chief
A three month deadline for blueprints to overhaul India’s financial services industry is highly ambitious. Yet that is what Duvvuri Subbarao, India’s central bank governor, has given the boards of the country’s commercial banks to devise strategies to bank millions of unbanked people. Read more