GOOD READS

RBI unexpectedly raises rates; trims rupee support steps

By Tony Munroe and Suvashree Dey Choudhury

MUMBAI (Reuters) - Reserve Bank of India (RBI) Governor Raghuram Rajan surprised markets in his maiden policy review on Friday by raising interest rates to ward off rising inflation, while scaling back some of the emergency measures recently put in place to support the ailing rupee.

Rajan, who took office early this month amid worst economic crisis since 1991, increased the RBI's policy repo rate by 25 basis points (bps) to 7.50 percent, defying most forecasts that he would leave the rate on hold to bolster a sluggish economy.

As expected, the former IMF chief economist struck a hawkish tone on price pressures in Asia's third-largest economy.

He was non-committal about the direction of the next policy rate move but said he intends to continue withdrawing liquidity tightening steps that had been implemented to stabilise the currency as market conditions allow.

While raising the traditional policy rate, Rajan freed up market liquidity with a three-quarter point cut in an overnight borrowing rate that the central bank had temporarily raised by 200 bps in July to support the rupee.

"In our view, the RBI has risked sending a confused signal to markets, and the withdrawal of tightening measures may be premature," Goldman Sachs economist Tushar Poddar wrote, adding that he expects the rupee to remain under pressure.

However, several traders said they expected the rupee to soon to resume its recent recovery from a record low on August 28, propelled by the U.S. Federal Reserve's decision not begin tapering its stimulus, as well as the Indian rate hike.

On Friday, the rupee fell, while stocks and bonds also weakened.

Despite an economy that grew at just 4.4 percent in the June quarter, its weakest in four years, Rajan opted to increase policy interest rate for the first time in nearly two years, following similar moves by Indonesia and Brazil, whose currencies have also been hit by heavy capital outflows in recent months.

The wholesale price index (WPI) inflation rose to a six-month high of 6.1 percent in August, with consumer price inflation (CPI) at 9.52 percent.

"In the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year," Rajan, 50, said in a policy statement that reaffirmed his penchant for surprise.

In his first day on the job, Rajan unexpectedly outlined an action plan to revive the rupee and bolster financial markets and the banking system.

"What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence," he said.

While Indian growth rates are less responsive to interest rate changes than in some countries, Indian voters are highly sensitive to inflation. Several states hold elections in coming months, with the general election due by May.

"What's clear now is that Rajan is very focused on containing inflation and the currency, and that means high interest rates until we see prices coming down and a greater fiscal discipline," said Aneesh Srivastava, Chief Investment Officer, of IDBI Federal Life Insurance.

For full coverage on the RBI review, click http://in.reuters.com/subjects/rbi-policy-review

ROLLING BACK RUPEE SUPPORT

The rupee fell as much as 20 percent this year to a record low in late August as investors pulled money from emerging markets ahead of an expected move by the Fed to begin scaling back its massive stimulus.

It has recovered some of those losses since Rajan took over at the RBI amid high expectations on September 4, gaining about 9 percent through Thursday.

"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," said Anubhuti Sahay, economist at Standard Chartered in Mumbai.

The Fed's surprise move to forge ahead with its easy money policy gave Rajan extra space to roll back some of the steps imposed to bolster a currency that had been the worst performer in Asia, dragged down by investor worries over the country's record current account deficit.

Rajan, who famously forecast the global financial crisis, said on Friday that domestic drivers of the rupee now take precedence: "The focus has turned to internal determinants of the value of the rupee, primarily the fiscal deficit and domestic inflation.

The RBI on Friday reduced the marginal standing facility (MSF) rate to 9.50 percent, which makes borrowing cheaper for banks. Since mid-July, the MSF has been widely been viewed as India's effective policy rate.

Rajan said on Friday he wants the repo rate to resume its place as the operational policy rate as temporary rupee support measures are unwound, returning the gap between the repo rate and the MSF rate to its customary 100 basis points.

"It could be that we walk (move) more on the MSF side, but it could be that the repo rate will do some of the walking. I want to be at this point entirely neutral on what the next step would be. It would be dependent on economic conditions," he told a media briefing.

(Additional reporting by Neha Dasgupta, swati Bhat, Subhadip Sircar, Archana Narayanan, Aradhana Aravindan and Himank Sharma; Editing by Kim Coghill)

Quiz: How well do you know India's economy?

Question 1

Which of these products is India the world's largest producer of?

Poll Choice Options
  • Wheat
  • Rice
  • Milk
1
2
3
4
5
6
7
8
9
10

Latest News

  • White House considers former banking lawyer for Fed board - sources

    NEW YORK/WASHINGTON (Reuters) - A former lawyer with the American Bankers Association is being considered by the White House as a possible nominee to the board of the Federal Reserve, according to sources familiar with the efforts The lawyer's name emerged as the White House weighs candidates with community banking backgrounds to fill gaps on the Federal Reserve's powerful but depleted board, the sources said. People familiar with the White House's process said administration officials may …

  • Apple expands buybacks by $30 billion, OKs 7-for-1 stock split

    Apple Inc (AAPL.O) has approved another $30 billion in share buybacks till the end of 2015 and authorized a rarely seen seven-for-one stock split, addressing calls to share more of its cash hoard while broadening the stock's appeal to individual investors. Activist investor Carl Icahn, who had famously called on the iPhone maker to boost its buyback program, tweeted his approval of the move on Wednesday. On Wednesday, Apple reported sales of 43.7 million iPhones in the quarter ended March, …

  • Buffett: moving oil by rail safely major industry concern

    Warren Buffett, chairman of conglomerate Berkshire Hathaway (BRKa.N), said on Wednesday that safety is a major priority for the rail industry, after a recent spate of accidents raised concerns about how to transport oil safely. He added that the delay in the construction of the Keystone pipeline was unlikely to prompt additional purchases of tank cars at Berkshire railroad unit BNSF. Buffett also said, in an interview with CNBC the same day, that he thinks Coca-Cola's (KO.N) equity …

  • Asia markets: Tech sector brightens as Apple jumps 8 percent

    Asian markets could get a lift on Thursday after tech heavyweights Apple and Facebook beat Wall Street expectations, sending their stock up sharply and boosting Nasdaq futures. The Nasdaq futures were up 1 percent and the S&P 500 0.3 percent. Sentiment on the tech sector brightened after Apple (AAPL.O) decided to buy back $30 billion of its shares out to the end of 2015 and authorized a seven-for-one stock split. Apple reported sales of 43.7 million iPhones in the quarter ended March, far …

  • India may cede top rice exporter spot under Southeast Asian price onsl …

    India's rice exports could slide by nearly a quarter this year and knock the country off its perch as top exporter of the grain due to stiff competition from Southeast Asian rivals that have recently slashed prices, Indian industry executives said. A drop in Indian exports could help Thailand trim a record inventory chalked up under a controversial rice-buying scheme. Thailand may also be able to reclaim its status as the world's biggest rice exporter, which it lost to India two years ago. …

IN-DEPTH ANALYSIS & INTERVIEWS

  • This might well be India’s biggest Ponzi scam

    It was just too good to be true. Ashok Khital, 45, displays every symptom of a man who knows he's been conned. …

  • India's star studded football league

    High and mighty including Sachin, Salman & Sun Group buy ISL teams …

  • Leaderspeak with Rajesh Janey

    Rajesh Janey, President - India & SAARC, EMC shares many firsts in his life. …

  • Seed of Doubt

    Field trials have been allowed again in India. But two decades after their global launch, genetically modified (GM) crops remain controversial. …

  • Power Hungry

    Gujarat has power round-the-clock. Most other states do not. Why this will matter in the general elections. …

  • Etcetera

    The most keenly watched contest of the current general election will be the one for the Varanasi parliamentary seat, where the Bharatiya Janata Party's prime ministerial hopeful Narendra Modi squares off ... …

  • Economy vs Democracy

    As the country gets election fever, cash comes out of mattresses and turns into liquor, gifts, and food. But it is not bad for the health of the economy, reports Sarika Malhotra from the trenches. …

MARKET MOVERS

    •  
      Recent Quotes
      Symbol Price Change % ChgChart 
      Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
      You need to enable your browser cookies to view your most recent quotes.
    • Recent Quotes News

      •  
        Sign-in to view quotes in your portfolios.