RBI hikes repo rate by 25bps

GDP growth forecast dropped to 6-6.5%; Inflation estimate hiked 150bps to 6.5%.

The Reserve Bank of India (RBI) kept the Bank Rate untouched at 6% today, but raised the repo rate by 0.25% to 4.75% from tomorrow.

"In view of the current macroeconomic and overall monetary conditions, it has been decided to increase the fixed repo rate by 25 basis points under the liquidity adjustment facility (LAF) of the Reserve Bank effective from October 27, 2004 to 4.75% from 4.50%. The reverse repo rate will continue to be linked to the repo rate, as at present. However, the spread between the repo rate and the reverse repo rate is reduced by 25 basis points from 150 basis points to 125 basis points with effect from October 27, 2004.

"Accordingly, the fixed reverse repo rate under LAF will continue to remain at 6%. As already announced, it is proposed to switchover to the international usage of the terms 'repo' and 'reverse repo' effective October 29, 2004. With such a switchover, the fixed reverse repo rate will be 4.75% and the repo rate will be available with a spread of 125 basis points at 6%," RBI Governor Y V Reddy said while releasing the Mid-Term Review of the Monetary Policy for 2004-05 today.

 

Repo Rate Changes Since Oct 25, 2000
Rate (in %)	Effective Date
4.75	27-10-2004
4.50	25-08-2003
5	03-03-2003
5.50	30-10-2002
5.75	27-06-2002
6	05-03-2002
6.5	28-05-2001
6.75	27-04-200
7	02-03-2001
7.5	20-02-2001
8	25-10-2000

The economic growth for the current fiscal has been scaled down to 6-6.5% from 6.5-7%, the RBI said in its mid-term review of annual policy here today.

"While the prospects are still somewhat unclear, the current assessments clearly indicate that agricultural growth of 3%, projected earlier, will not materialise," the statement said.

"While the CSO estimate of GDP for the first quarter (growth of 7.4%) is consistent with the earlier projected growth of 6.5-7% for the full fiscal, deficient rainfall in some parts of the country and its impact on Kharif crop impart a downward bias to this growth projection. In addition, higher oil prices tend to have an adverse impact on GDP growth. At the same time, improved prospects for growth in industrial output and continued buoyancy in exports are likely to have a positive impact on growth. On the whole, while the picture is not very clear, it may be reasonable to place the overall GDP growth for the year 2004-05 in the range of 6-6.5% as against the earlier expectation of 6.5-7% assuming that the combined downside risks of high and uncertain oil prices, and sudden changes in international liquidity environment remain manageable," the statement said.

The inflation based on the wholesale price index (WPI) estimate has been raised to 6.5% from the earlier 5%.

"It may be recalled that the annual policy statement had assumed the annual inflation rate at around 5% by the end of 2004-05, on the basis of point-to-point variation in WPI. This projection was made at a time when IMD had predicted a normal monsoon for the current year. The statement had drawn attention to the underlying risks to inflation emanating from international oil and commodity prices given the pass through of international prices to domestic inflation. The statement had also cautioned about the potential inflationary impact of persistence of excess liquidity on aggregate demand. In retrospect, the magnitude and persistence of supply shocks was beyond what was anticipated by many. While there are uncertainties regarding the future course of international commodity prices, particularly oil prices, it is now clear that the year-end inflation projection will exceed what was anticipated at the beginning of the financial year. On current assessment, assuming that there would be no further major supply shock and liquidity conditions remain manageable, the point-to-point year-end inflation based on WPI for the year 2004-05 could be placed around 6.5%," the statement said.

The central bank announced a hike in NRE deposit rates to align it with international rates by 50 bps.

"With a view to aligning interest rates on Non-Resident (External) Rupee (NRE) deposits with international interest rates, ceiling on NRE deposit rates linked to the US dollar LIBOR/SWAP rates of corresponding maturities was introduced effective July 17, 2003. The ceiling interest rates on NRE deposits have since been revised from time to time. On a review, it is proposed to raise the ceiling on NRE interest rates to LIBOR/SWAP rates of US dollar of corresponding maturities plus 50 basis points from the existing level of US dollar LIBOR/SWAP rates," the statement said.

The RBI said it would pursue an interest rate environment that is conducive to macro-economic growth and price stability and maintaining the momentum of growth.

"The overall stance of the monetary policy for 2004-05 would be provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability," the statement said.

The central bank said banks have been allowed to fix the ceiling on interest rates on FCNR(B) deposits on a monthly basis.

The minimum tenor of the retail domestic term deposits has been reduced to seven days, it added.

The pick-up in investment activity and significant growth in the non-food credit appear to be broad and are not a temporary phenomenon, Reddy said.

"As the magnitude and persistence of supply shock was partly unanticipated, the demand management seems to invite closer attention, particularly for stabilising inflationary expectations in a credible manner," he said.

While the RBI would continue to pursue stability, the market should be prepared for uncertainties, he added.

The central bank has enhanced the limit on advances under priority
sector for improving credit delivery to agriculture sector, and has
asked banks to increase disbursements to small and marginal farmers under the Special Agricultural Credit Plans (SACP) by March 2007.

It has allowed banks to extend direct finance to housing sector up to Rs 15 lakh under priority sector lending.

The statement said there was robust increase in non-food credit by 11.5 % up to October 1, 2004 as compared to an increase of 6% in the previous year.

Money supply growth up to October 1, 2004 was lower at 5.4% as compared to 7.8% in the previous year while the projected expansion of money supply for 2004-05 was retained at 14%.

The central government has completed gross market borrowings of Rs 75,044 crore during the current fiscal up to October 21, 2004, which is 49.8% of the budgetary amount. The centre has completed net market borrowings of 29% of the budgeted amount up to October 21, 2004.

"The borrowings programme in the remaining part of the year needed to be calibrated carefully in view of of strong credit demand," the statement said.

Click here for PDF and WORD versions of RBI release