The unexpected hike in interest rates by the new Reserve Bank of India Governor, Raghuram Rajan, caught the corporate sector by surprise and spooked the stock market. In fact, the hike in the repo rate eclipsed the equally significant cut in Marginal Standing Facility (MSF) rate.
In his maiden monetary policy review Rajan raised the repo rate (at which the central bank lends short-term money to banks) from 7.25 per cent to 7.50 per cent to bring down inflation to more tolerable levels. On the other hand, the Governor reduced the MSF rate (at which banks borrow from the central bank) by 75 basis points, at 9.50 per cent down from 10.25 per cent, in order to ease the liquidity situation. It was widely expected that the central bank would stay pat on interest rates as inflation is ruling high and economic growth remains tepid.
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