RBI Surprises Again: Repo Rate Up By 25 Basis Points

RBI Governor, Dr. Raghuram Rajan, has once again managed to outwit most of the economist and market analyst by raising the repo rate by 25 basis points from 7.75% to 8%. According to the polls conducted by various media, most of the economists were expecting a status quo on repo rate.

The reasons why street was expecting a status quo was softening of both consumer price index (CPI) inflation as well as wholesale price index (WPI) last month, while the growth measured by Index of Industrial Production (IIP) contracted. RBI, however, has different view according to Dr. Rajan “Although headline inflation has fallen significantly with the substantial fall in vegetable prices, CPI inflation excluding food and fuel has remained flat and WPI inflation excluding food and fuel has risen.” and therefore rate hike is in line with indications given earlier by RBI. 

The rate hike became more imminent due to recent sell-off in emerging market currencies led by more than 15% fall in the Argentinean Peso in last less than a week. Moreover, recent slowdown in the Chinese economy better reflected by the recent fall in Purchasing Managers’ Index (PMI) that came at 49.6 and further wind back of its monetary stimulus by US Federal Reserve led to such precautionary stance by RBI. 

The equity market responded sharply to this unexpected rate hike and BSE Sensex fell by 140 points and is trading in red now against a marginal gain at which it was trading before the rate hike. 

Keep an eye on this space for detailed analysis of the Third Quarter Review.