The Reserve Bank of India (RBI) made another hike in the repo rate by 25 bps to 7.75% in its second quarter review of monetary policy for 2013-14. The repo rate is the rate at which the Central bank lends money to commercial banks. The Central bank also reduced the marginal standing facility (MSF) rate by 25 bps to 8.75%. The MSF rate is the rate at which the banks borrow funds overnight from the RBI against government securities. Further, it left the cash reserve ratio (CRR) unchanged at 4%.

The apex bank continues to maintain hawkish stance. The anticipated elevated levels of both wholesale and consumer price inflation in the months ahead prompted RBI to opt for a rate hike measure. But few things did bring respite. The initial signs of recovery and stability have been witnessed in the foreign exchange market. Steps towards curtailing current account deficit are gradually yielding results. This enabled RBI to roll back the tightening measures and enhance liquidity into the system. Hence, the MSF rate was cut down to 8.75%. With these measures, the MSF rate and the bank rate now stand recalibrated to 100 bps above the repo rate.

Going forward, the central bank continues to closely monitor inflation risks. At the same time, it remains cognizant of strengthening growth dynamics. However, curbing the rising inflationary spiral and containing the food price inflation will continue to pose challenges.