Reserve Bank keeps key interest rates unchanged

Monetary policy review: Focus on containing inflation

Reserve Bank keeps key interest rates unchanged

In a largely expected move, the Reserve Bank of India on Tuesday kept policy rates unchanged in its fifth bi-monthly monetary policy.

However, the central bank gave enough indications that a rate cut could not be far away and may come early in 2015.

While the repo rate was kept unchanged at 8 per cent, the cash reserve ratio (CRR) was maintained at 4 per cent. Reverse repo and bank rates were also kept unchanged at 7 per cent and 9 per cent respectively.“If the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” RBI said in its policy.

“We want to get more certainty about the pace of disinflationary process, get a little more sense of some developments on the fiscal front and that is why the stance remains unchanged. As the information comes in, our sense is that if it goes according to expectations, it will be towards monetary easing. The stronger the information, the sooner the accommodation,” RBI Governor Raghuram Rajan said.

Our course of action is determined by the incoming data which we have been saying for some time that the data will drive policy. Going forward, as we do not want to flip flop we want to be relatively sure that we are on track, Rajan added.Interestingly, RBI has revised its CPI inflation forecast to 6 per cent for March 2015 from 8 per cent earlier.

“Risks from imported inflation appear to be retreating, given the softening of international commodity prices, especially crude, and reasonable stability in the foreign exchange market. Accordingly, the central forecast for CPI inflation is revised down to 6 per cent for March 2015,” RBI said.

Expected lines

Bankers said that the RBI’s move to maintain status quo is very much on expected lines adding that a reversal in rate cycle is close as indicated in the policy.

“The RBI assertion of a possible change in monetary policy stance next year is a clear vindication and acknowledgement of a benign inflation regime. In fact, by advancing the inflation target of 6 per cent to March 2015, RBI has now set out a clear message of the reversal of the rate cycle, sooner than later. With oil prices at historic lows, a stable exchange rate and strong capital inflows, the feel good factor is here to stay,” SBI chairman Arundhati Bhattacharya said.

“The policy announcement was along expected lines both in content and the underlying tone, which suggested an accommodative stance in the period ahead (even outside of policy review cycle), should data flow suggest continued easing up of inflation,” Federal Bank MD and CEO Shyam Srinivasan said.

Ease of doing business

Further the likely announcement regarding the extension of the 5:25 formula for existing projects points to the fact that there is focus on creating enablers for easing up of business conduct and lubricating the system, thereby stimulate credit flows and industrial activity, Srinivasan added.

“The policy signals RBI’s resolve to firmly contain inflation and inflationary expectations, while responding to developments in inflation and fiscal consolidation. The economy has already received boost in terms of sentiment and confidence. The results of government actions to energise investment activity should start playing out in the coming months. As this happens and interest rates moderate, we should see an improvement in growth going forward,” ICICI Bank MD & CEO Chanda Kochhar said.

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