Notwithstanding the current inflation being high, the Reserve Bank of India (RBI) on Wednesday kept its key policy rates on hold, citing the prospect of easing retail prices and its concerns over the weak domestic economy.
As such, the repo, Cash Reserve Ratio (CRR) as well as Marginal Standing Facility (MSF) rate were kept unchanged at 7.75 per cent, 4.0 per cent and 8.75 per cent respectively.
Popular perception was that the RBI would lift its repo rate – the rate at which bank borrows money for short term use – by at least 25 basis points (bps) citing the persistently high inflationary pressure a bit too much for the central bank to ignore.
However, the RBI said, "The policy decision is a close one. Current inflation is too high," and also cited its reluctance to over-react given the "wide bands of uncertainty" surrounding the outlook for inflation amid signs of sharply falling vegetable prices and "the weak state of the economy."
The central bank also said it would remain vigilant on inflation and ready to act even in between policy reviews should headline or core inflation not ease as expected, albeit in a "calibrated" manner.
The Consumer Price Index (CPI) inflation numbers rose to 11.24 per cent in November compared with 10.17 per cent in the previous month. The Wholesale Price Index (WPI) inflation data for November rose to 7.52 per cent compared with 7 per cent in the previous month.
RBI Governor Raghuram Rajan said, "There are indications that vegetable prices may be turning down shortly ... our current reading from the metros suggest a significant fall in vegetable prices both at the wholesale and retail level which gives us reason to keep interest rates stable."
The RBI added it would gauge the impact of any decision by the US Federal Reserve to withdraw its monetary stimulus. The US central bank concludes its policy meeting later in the day.
"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. The Reserve Bank will be vigilant," RBI added.
Responding to a query, Rajan said, "The level of NPAs (non-performing assets) and restructured loans is not alarming at this point in time, but it is something we want to take action on quickly before it gets to the point that it is alarming."
In a conference call with analysts, RBI chief said: "As far as rollback of measures, we have ample liquidity in the system. We have gone back to normal monetary policy at this point."