"If inflation in food and fuel do not fall, RBI will act on off policy date," RBI Governor Raghuram Rajan said soon after unveiling the mid-quarter review of monetary policy.
RBI has kept short-term lending rate unchanged at 7.75 percent, while the cash reserve ratio (CRR) remained at 4 percent. The next policy review is due on January 28.
Noting that current inflation is too high, he said, "given the weak state of economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."
"There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation," he said, adding, the Central Bank will remain vigilant.
Since taking over as the RBI chief in September, Rajan had increased the key rate by 0.50 percent in two installments. The status quo decision came as a surprise as only last week the RBI had pulled up banks for not helping it in monetary policy transmission.
The decision to keep rates unchanged will be a big breather for the industry and retail borrowers in particular as the markets had expected another 0.25 percent hike in the short-term lending rate.

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While retail inflation soared to a nine-month high of 11.24 percent in November, the index based on wholesale prices zoomed to a 14-month high of 7.52 percent last month.
Factory output shrank 1.8 percent in October, the first contraction in the Index of Industrial Production (IIP) in four months.

Analysts are of the opinion that inflation has peaked and will ease from December as food prices cool on better supplies with winter crops coming in.
Talking about the economy, Rajan said, growth is set to improve in the second half of this financial year on the back of expansion in the agriculture sector, exports and movement in stalled projects.

GDP growth in the second quarter of this financial year came in at 4.8 percent after a reading of 4.4 percent in the first quarter, resulting in a 4.6 percent expansion in the first half.

•    RBI keeps key policy rate, cash reserve ratio unchanged.

•    Repo rate unchanged at 7.75 percent; cash reserve ratio unchanged at 4 percent.

•    RBI to wait for more data before taking policy action.

•    Outlook on global growth continues to remain moderate.

•    Volatility in the financial markets could pick up following the inevitable taper of the quantitative easing in the US.

•    Lacklustre indicators on services and subdued domestic consumption point at continuing headwinds to growth.

•    Expenditure cuts by Govt will only add to the pressures on the growth front.

•    Revival of stalled investments crucial for growth.

•    High inflation numbers risks entrenching inflation expectations at unacceptably elevated levels.

•    High and persistent inflation also increases the risks of exchange rate instability.

•    RBI expects inflation to be contained on vegetable prices going down sharply.

•    Current inflation is high but its trajectory is uncertain and there is merit waiting for more data.

•    RBI to be vigilant and will act between scheduled policies if expected softening in food prices does not materialize.


SBI Chairperson Arundhati Bhattacharya said the bank would not contemplate cutting deposit rates as "it really hurts the depositors and we would not like to do that. Our rates are still higher than what it was on July 15, I see no immediate rate cut."

Shifting his stance from inflation management, Rajan said continuing weakness in economic growth was the main driver of his policy action.

Enthused by the policy announcement, the stock markets reacted positively. The S&P BSE Sensex climbed for the first time in seven days, reaching the day's high of 20,917.57, a rise of 305 points from on Tuesday's close.

Bank of India Chairperson V R Iyer said there is no room for cutting lending and deposit rates at the moment. "Inflation is very high and there is hardly any scope for us to reduce the interest rate on deposits, at least at the year end. Absolutely, we will not be able to do that at the moment. But the bulk deposit rate we will be able to take a call and reduce the rate," Iyer said.
"Immediately, there will not be any room for us to reduce the base rate," she added.

Commenting on the policy, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said, "It is a difficult balancing act...I certainly think that the priority to RBI is price stability and therefore they should keep continuous watch on what is happening to inflation."

Welcoming the RBI's status quo decision, the Confederation of Indian Industry (CII) said prices of food items would moderate and with the rupee stabilizing, there should be no sudden increases in fuel prices.     

"To some extent, that obviates the need for further monetary tightening. Therefore, the RBI has demonstrated restraint and foresight to strike the right balance between inflation and growth," it said.
There was a massive improvement in the current account deficit (CAD), which narrowed to 1.2 percent of GDP in the second quarter after a steep decline in gold imports. The CAD was 4.9 percent of GDP in the first quarter (April-June).
"I would be much happier if we had the kind of CAD we have without significant curbs on anything, including gold. We should aim to have a CAD without any distortions, removing the incentives for smuggling, that is what we will be working for," Rajan said at a press conference.
The CAD, which is the excess of foreign currency outflows over inflows, had touched a record high of USD 88.2 billion, or 4.8 percent of GDP, in the previous financial year. The government hiked import duty on gold to 10 percent and the RBI also imposed curbs on inward shipments of the metal by linking them to exports, helping to narrow the CAD.
In the first half of 2013-14, the CAD stood at USD 26.9 billion (3.1 percent of GDP), compared with USD 37.9 billion (4.5 percent of GDP) in the first half of 2012-13.
"At this point, I feel very comfortable with where we are on CAD," Rajan said.
The government and the RBI expect the CAD to be contained at USD 56 billion this year.

TIMELINE: Changes to repo rate since June 2000
RATE (percent) EFFECTIVE DATE (day-month-year)

7.50 20-09-2013

7.25 03-05-2013

7.50 19-03-2013

7.75 29-01-2013

8.00 17-04-2012

8.50 25-10-2011

8.25 16-09-2011

8.00 26-07-2011

7.50 16-06-2011

7.25 03-05-2011

6.75 17-03-2011

6.50 25-01-2011

6.25 02-11-2010

6.00 16-09-2010

5.75 27-07-2010

5.50 02-07-2010

5.25 20-04-2010

5.00 19-03-2010

4.75 21-04-2009

5.00 04-03-2009

5.50 02-01-2009

6.50 08-12-2008

7.50 03-11-2008

8.00 20-10-2008

9.00 29-07-2008

8.50 24-06-2008

8.00 11-06-2008

7.75 30-03-2007

7.50 31-01-2007

7.25 30-10-2006

7.00 25-07-2006

6.75 08-06-2006

6.50 24-01-2006

6.25 26-10-2005

6.00 31-03-2004

7.00 19-03-2003

7.10 07-03-2003

7.50 12-11-2002

8.00 28-03-2002

8.50 07-06-2001

8.75 30-04-2001

9.00 09-03-2001

10.00 06-11-2000

10.25 13-10-2000

13.50 06-09-2000

15.00 30-08-2000

16.00 09-08-2000

10.00 21-07-2000

9.00 13-07-2000

12.25 28-06-2000

12.60 27-06-2000

13.05 23-06-2000

13.00 22-06-2000

13.50 21-06-2000

14.00 20-06-2000

13.50 19-06-2000

10.85 14-06-2000

9.55 13-06-2000

9.25 12-06-2000

9.05 09-06-2000

9.00 07-06-2000

9.05 05-06-2000

Note: Prior to October 29, 2004, the repo rate was known as the reverse repo rate.


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