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“..an increase in the policy (repo) rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path,” Rajan said while unveiling the Third Quarter Review of Monetary Policy.
Consequently, the reverse repo rate under the liquidity adjustment facility will be revised to 7 per cent and the marginal standing facility rate and bank rate to 9 per cent.
However, the Central Bank kept the cash reserve ratio unchanged at 4 per cent as liquidity seems to be comfortable.
It was widely expected that Rajan would maintain the status quo on rates to support growth. Ahead of the quarterly review, Rajan had termed inflation a “destructive disease.”
The governor said India’s economic growth would be below 5 per cent in the current financial year and could accelerate in 2014-15 to a mean projection of 5.5 per cent.
“The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture,” he said.
The repo rate hike is likely to have a bearing on interest rates and may push up the cost of funds for retail as well as corporate borrowers.