In a surprise move that sent the markets and analysts into a tizzy, RBI governor Raghuram Rajan raised the repo rate by a quarter per cent, signalling a high interest rate regime. He said this was a mere 0.5 per cent of the total borrowings of banks.
He, however, cut the marginal standing facility (MSF) rate by 0.75 percentage points and the minimum cash reserve ratio (CRR), which banks have to keep daily with the RBI, to 95 per cent from 99 per cent. These would bring down the cost of borrowing of banks by three per cent.
The Sensex tanked 293 points within a few minutes of the repo announcement as the markets were expecting Dr Rajan to reverse his predecessor D. Subbarao’s mid-July emergency policies to bring stability to the rupee. But he merely tinkered with the short-term borrowing rates by making it cheaper and signalled higher long-term rates. In short, borrowers lose in the long term but depositors may gain if deposit rates go up, said Madan Sabnavis, chief economist, Care Ratings. Banks, however, are yet to decide whether they would increase the cost of loans.
Dr Rajan said that the RBI could ease the mid-July exceptional tightening measures, as the government has taken measures to bring down the current account deficit and improve the prospects of its stable funding. Banks have started bringing in money and till Wednesday, he said, $1.4 billion had come in of which $466 million came through the foreign currency non-resident (FSNR)(B) accounts and $917 million through the swap facility. He said that
since the external factors impacting the rupee have been dealt with, the focus is now on “internal determinants”, primarily fiscal deficit and domestic inflation.