RBI keeps policy rates unchanged
India's central bank Wednesday kept key policy rates unchanged in a bid not to weaken growth
RBI Governor Raghuram Rajan surprised the markets today by leaving all key policy rates unchanged, notwithstanding persistent high inflationary pressure.
The short-term lending rate was kept unchanged at 7.75 per cent, while the cash reserve ratio (CRR) remained at 4 per cent, the Reserve Bank of India said in its Mid-Quarter Monetary Policy Review.
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 25 bps hike in the short-term lending rate.
The Reserve Bank said it will take "calibrated action" in the future, based on inflationary trends and action by the US Federal Reserve.
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.
Since taking over as the RBI chief in September, Rajan had increased the key rate by 0.50 per cent in two instalments.
Shifting his stance to promote growth from inflation management, Rajan said continuing weakness in growth was the main driver of his policy action.
The stock markets reacted positively and the S&P BSE Sensex shot up 140 points to 20,852 immediately after the policy was announced.
State Bank of India 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 response toward rate cut."
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."
While retail inflation soared to a nine-month high of 11.24 per cent in November, the index based on wholesale prices zoomed to a 14-month high of 7.52 per cent last month.
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. Rajan, however, sounded cautious when he said, "The policy decision is a close one. Current inflation is too high.
However, given the wide bands of uncertainty surrounding the short-term path of inflation from its high current levels, and given the weak state of the economy...there is merit in waiting for more data to reduce uncertainty."