RBI keeps lending rate at 8%

Policy review takes steps to hike liquidity, contain money volatility

RBI keeps lending rate at 8%

 For once, the Reserve Bank of India (RBI) Governor Raghuram Rajan went in with street expectations and kept policy rates unchanged in the first bi-monthly review of the RBI's monetary policy as retail inflation still remains "sticky", while introducing steps to increase liquidity and contain volatility in the money market.

"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," Rajan, who had in previous policy announcements surprised the markets with policy rate changes, said. 

He kept the repo rate and cash reserve ratio (CRR) unchanged at 8 per cent and 4 per cent respectively stating that they are "appropriately set." 

The repo rate is the rate at which banks borrow money from RBI for short-term use, while CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.

The central bank also kept the bank rate and MSF rate unchanged at 9 per cent. However, it cut borrowing under liquidity adjustment facility (LAF) to 0.25 per cent from 0.5 per cent of NDTL (Net Demand and Time Liabilities) in the overnight repo market and increased liquidity under 7-day and 14-day term repos from 0.5 per cent to 0.75 per cent of NDTL.

Although, RBI noted that lead indicators do not point to any sustained revival in industry and service, it hoped that real GDP growth may pick up to 5-6 per cent in 2014-15 from sub-5 per cent this fiscal.

The governor also gave hope to investors and corporate by saying that if inflation continues along the intended glide path, further policy tightening in the near term may not be required.

To battle inflation, Rajan had raised interest rate three times since he took charge in September. Though the February reading for inflation is much closer to RBI’s target of 8 per cent CPI by January 2015, the RBI maintained that risks to the central forecast persist.

RBI cautioned that "there are risks to the central forecast of 8 per cent CPI inflation by January 2015 stemming from a less-than-normal monsoon due to possible El Nino effects; uncertainty on the setting of minimum support prices for agricultural commodities and the setting of other administered prices, especially of fuel, fertiliser and electricity; the outlook for fiscal policy; geopolitical developments and their impact on international commodity prices." Rajan did not rule out softer headline inflation in 2014 on the back of the base effects of high inflation during June-November 2013, but called it a temporary phenomenon.

RBI also reduced the availability of overnight funds from its repo window for banks and increased the amount that banks may borrow from its term repo window in a bid to reduce lenders' reliance on short-term central bank funding.

Retail inflation, as measured by the consumer price index, eased to a two-year low of 8.10 per cent in February from 8.79 per cent in January, having touched a high of 11.24 per cent in November.

Inflation based on the wholesale price index fell to a nine-month low of 4.68 per cent in February on the back of a drop in food and fuel prices, having been at 5.05 per cent in January. But data from Barclays shows inflationary expectation is running at 12 per cent, the highest in recent memory.

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