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20 Sep 2013
Sensex plummets on India central bank repo rate hike, INRUSD falls
FXstreet.com (London) - The Reserve Bank of India has unexpectedly hiked repo rates, sending the Sensex tumbling by more than 500 points.
The RBI's new Governor Raghuram Rajan raised the repo rate by 25 bps to 7.50 percent.
The RBI also lowered its marginal standing facility rate by 75 bps to 9.50 percent.
Rajan stated that the objective of the RBI is to normalise the conduct and operations of monetary policy - as the measures are unwound, the objective is to normalise the conduct and operations of monetary policy so as to allow the LAF repo rate to resume its role as the operational policy interest rate.
Rajan voiced concerns about Rupee strength, with capital outflows driven higher in recent weeks, thanks to concerns that the US Federal Reserve was going to cut the size of its monthly asset purchases driving up FX market volatility. Now that this driver has been mitigated, the focus has turned to internal determinants of the Rupee, primarily India’s fiscal deficit and domestic inflation.
Rajan stressed that, while the RBI should always focus on inflation, the RBI was not the sole determinant of inflation. He was particularly keen to stress that RBI was not able to exert an authority over food inflation, a major headache for the Indian economy.
While Rajan’s speech has sent the Sensex plummeting, it has had the desired effect on the Rupee, weakening USDINR to INR62.4850, weakening it from INR61.8550 ahead of the central bank announcement.
The RBI's new Governor Raghuram Rajan raised the repo rate by 25 bps to 7.50 percent.
The RBI also lowered its marginal standing facility rate by 75 bps to 9.50 percent.
Rajan stated that the objective of the RBI is to normalise the conduct and operations of monetary policy - as the measures are unwound, the objective is to normalise the conduct and operations of monetary policy so as to allow the LAF repo rate to resume its role as the operational policy interest rate.
Rajan voiced concerns about Rupee strength, with capital outflows driven higher in recent weeks, thanks to concerns that the US Federal Reserve was going to cut the size of its monthly asset purchases driving up FX market volatility. Now that this driver has been mitigated, the focus has turned to internal determinants of the Rupee, primarily India’s fiscal deficit and domestic inflation.
Rajan stressed that, while the RBI should always focus on inflation, the RBI was not the sole determinant of inflation. He was particularly keen to stress that RBI was not able to exert an authority over food inflation, a major headache for the Indian economy.
While Rajan’s speech has sent the Sensex plummeting, it has had the desired effect on the Rupee, weakening USDINR to INR62.4850, weakening it from INR61.8550 ahead of the central bank announcement.