MUMBAI (Reuters) - Reserve Bank of India unexpectedly raised its policy interest rate by 25 basis points on Friday but rolled-back some of the measures it had implemented to support the battered rupee currency.
In his first monetary policy review since taking office on Sept 4, RBI Gov. Raghuram Rajan increased the repo rate by 25 basis points to 7.50 percent. Economists had widely expected the RBI to leave the repo rate unchanged.
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."
UPASNA 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."
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."
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."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
"I think at this moment, any cut or hike in repo rate actually does not matter. Banks have liquidity shortage of in excess of 0.5 percent of NDTL (net demand and time liability). In fact, MSF rate which is the policy rate as of now, and that policy rate has been cut, that will bring down the wholesale funding rate by 75 basis points both for banks and corporates."
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI
"The long-term signal is that the RBI is still concerned with inflation.
"Easing short end of the curve, which it has done by cutting the MSF (marginal standing facility), reducing CRR requirements and etc. is a strong pro-growth signal. I think it (MSF) might be reduced even further."
ANEESH SRIVASTAVA, CHIEF INVESTMENT OFFICER, IDBI FEDERAL LIFE INSURANCE, MUMBAI
"The fear of tapering is yet not out and hence all the risk which we had before expectation of tapering is still alive. Indian inflation has gone up, but growth has subdued. My sense is that market at times gets buoyant for reasons which are not supported by economic reality, they would keep correcting.
"What we were trying to gauge with this policy is where the new governor stands. And what's clear now is that his leanings are the same as the old governor -- very focused on inflation and currency."
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS MUTUAL FUND, MUMBAI
"It is a very mixed policy, we have a rate cut and a rate hike in the same document. From a medium-term perspective, we see LAF rate becoming the operative rate that is clear, however the LAF rate itself will be higher than it cost before. While we do expect yields to settle down over a period of time, it will be at a higher level. Net net, the market is treating it as a rate hike rather than a rate cut.
"What's clear from a policy-making perspective is that the shift from WPI (wholesale price index) to CPI (consumer price index) will happen. And a very low core WPI inflation is not going to help bring rates down given that CPI is at 9.5 percent."
GRAPHIC: India CPI and WPI http://link.reuters.com/zar28t
Online link: http://in.reuters.com/subjects/rbi-policy-review
* Indian rupee extended falls to 62.10/15 versus the dollar immediately after the RBI's rate decision from 61.93/61.99. It was trading at 62.38/40 at 0555 GMT.
* The BSE Sensex extended falls to 1.7 pct from 0.1 pct previously. It was trading down 2.3 percent at 0555 GMT.
* India's benchmark bond yield rose 18 bps to 8.36 pct after the RBI policy statement.
* India's 1-year OIS was up 16 bps at 8.95 pct post RBI policy, according to dealers
* India's 5-year OIS was up 9 bps at 8.20 percent
- Food inflation accelerated to a three-year high of 18.18 percent in August, government data released on Monday showed, driving the benchmark Wholesale Price Index up by a stronger-than-expected 6.1 percent.
- Industrial output rose 2.6 percent in July from a year earlier, its first expansion in three months, lifted by a robust rebound in capital goods production - often seen as a barometer for investments in Asia's third-largest economy.
- Some Indian companies could see the quality of their debt decline as higher global borrowing costs and a sharply weaker rupee take their toll, Moody's Investors Service said last week.
- Foreign banks are pushing to raise billions of dollars from expatriate Indians in response to New Delhi's drive to defend its weak currency, which could mean the government can avoid the need for a sovereign bond or state-backed deposit scheme to attract inflows.
- India increased the import duty on gold jewellery to 15 percent from 10 percent on Tuesday, in a move aimed more at protecting the domestic jewellery industry rather than stemming overseas purchases to narrow its current account deficit.
(Reporting by Mumbai Treasury Desk)