RBI continues gradual policy exit

The Reserve Bank of India raised its key interest rates and banks’ cash reserve ratio by a small measure to continue its exit from the loose monetary policy in a gradual and growth-fostering manner.

Although inflation-adjusted interest rates still remain negative and reflect a crisis period setting, the policy interest rates will be “normalised” in a calibrated manner, the central bank said.

Effective April 20, reverse repo and repo rates have gone up by 25 basis points (bps) each to 3.75% and 5.25%, respectively.

Some economists had expected a bigger hike of 50 bps or more.

Even the increase in cash reserve ratio was only by 25 bps to 6%. This measure, which would drain only around Rs 12,500 crore on Friday, had to be small to ensure liquidity conditions are supportive of the mammoth government borrowing.

Some economists said RBI has stayed behind the curve with Tuesday’s measures and, hence, the markets face the risk of very steep hikes ahead.

“I think RBI has probably fallen a bit more behind the curve. The tightening is less than RBI’s own concerns over inflationary pressures,” said Jahangir Aziz, India chief economist, JP Morgan.

But, governor D Subbarao said “baby steps” are better suited for now.

“Everything need not be done in one step and we believe that moving in several baby steps towards normalisation is better for the economy to adjust to pre-crisis growth levels,” Subbarao told a press conference.

He indicated more tightening ahead and said the policy instruments will be aligned in a manner consistent with the evolving state of the economy.
Equity markets and government bond prices rose as the increase in policy rates and CRR were lower than what the markets had feared.