Reserve Bank of India hikes to 7.50 percent, reduces MSF rate to 9.5 percent.
The Reserve Bank of India (RBI) Governor Raghuram Rajan shocked investors by raising the key repo rate by a quarter point to fight inflation living up to the Chicago School’s anti-inflation tradition, even as he partially rolled back some of the liquidity tightening measures to fight the currency slide.
The Reserve Bank of India raised repo rate or the rate at which it lends to banks by 25 basis points to anchor inflation and inflationary expectations. The repo rate is increased to 7.5% from 7.25% with immediate effect.
RBI reduced the Marginal Standing Facility (MSF) rate by 75 basis points to 9.5% from 10.25% with immediate effect. The measure was taken to tighten liquidity and arrest volatility in the foreign exchange market.
The intent has been to maintain tight liquidity conditions at the short end of the term structure until the measures designed to alter the path of the CAD and improve prospects for its stable funding take effect.
RBI reduced minimum daily maintenance of the cash reserve ratio from 99% of the requirement to 95%. RBI said that any further change in the minimum daily maintenance of the CRR is not contemplated.
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