RBI Raises Key Rate to Fight Inflation

Good morning so the RBI New rates effective 29.10.2013 are :BTXtODVCQAALUaw

*Bank Rate:8.75%
*Repo Rate:7.75%
*Reverse Repo Rate:6.75%
*MSF Rate:8.75%
*Cash Reserve Ratio:4%

Well those are the rates where the governor Raghuram Rajan in his first “real” policy, increased the repo rate by 0.25% to 7.75% and cut the MSF rate by 0.25% to 8.75%. Reverse repo goes to 6.75%.

Well the above would be more clear providing you some understanding Repo is where banks borrow overnight from RBI, currently limited to 0.5% of all deposits. Reverse repo is where banks will park excess cash with RBI. MSF is the Marginal Standing Facility which is like Repo, but can be beyond the 0.5% limit and is at a higher rate.

The Policy was anti inflationary two other thing about the policy that I was waiting for :

*Foreign Banks can set up subsidiaries
Instead of operating as branches of offshore entities, foreign banks will soon be able to set up fully owned subsidiaries for Indian operations.

*CPI Indexed Bonds
The WPI indexed bonds have been a failure. Down 16% from the start, they have failed to behave as either a predictor of inflation expectations or as a financial instrument to tackle real inflation, which was way above the WPI levels expected.

The CPI that’s inflating at more than 9% is a better indicator of inflation, but again it’s the medium of distribution and the friction people face when buying fin products that will make a difference. Can it be bought online, or just via a form? Does it need more complicated KYC? We’ll have to see.

We can expect more to hear from the governor by himself, unfortunately I was just able to read the RBI policy till now.

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