Rajan delivers no surprises, holds interest rates

As expected, Reserve Bank Governor Raghuram Rajan today kept the key policy rate (repo) unchanged since retail inflation still remains "sticky" but introduced steps to increase liquidity and contain volatility in the money market.

The RBI, in its first bimonthly monetary policy statement, left the short-term lending rate or repo rate unchanged at 8 per cent and the cash reserve ratio static at 4 per cent. It halved the overnight call money rate to 0.25 per cent and increased the 7-day and 14-day repo limits to 0.75 per cent from 0.50 per cent.

"At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy," said Rajan, who had in previous policy announcements surprised the markets with policy rate changes.

If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, the Governor promised there won't be any rate hikes.

On liquidity moves, Rajan said the primary objective is to improve transmission of policy impulses across the interest spectrum and improve liquidity in the system.

"The term repo has evolved as a useful indicator of underlying liquidity conditions. It also allows market participants to hold liquidity for a longer period...evolving market-based benchmarks for pricing various financial products," he said.

On inflation, the Governor said he sees retail inflation softening in 2014 to under 6 per cent.

"Excluding food and fuel...retail inflation remained sticky around 8 per cent. This suggests that some demand pressures are still at play," he said.

The RBI pegged 2014-15 GDP growth at a central estimate of 5.5 per cent. It said the FY14 current account deficit would be about 2 per cent of GDP.