18.12.13

RBI maintains status quo

In a surprise relief to borrowers, Reserve Bank today left key policy rates unchanged but said it will hike interest rates if inflation does not subside in line with the expected declining trend.
"If inflation in food and fuel do not fall, RBI will act on off policy date," RBI Governor Raghuram Rajan said soon after unveiling the mid-quarter review of monetary policy.
RBI has kept short-term lending rate unchanged at 7.75 per cent, while the cash reserve ratio (CRR) remained at 4 per cent. The next policy review is due on January 28.
Noting that current inflation is too high, he said, "given the weak state of economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."
"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," he said, adding, the central bank will remain vigilant.
Since taking over as the RBI chief in September, Rajan had increased the key rate by 0.50 per cent in two installments.
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.
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 0.25 per cent hike in the short-term lending rate.
Shifting his stance from inflation management, Rajan said continuing weakness in economic growth was the main driver of his policy action.
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.
Factory output shrank 1.8 per cent in October, the first contraction in the Index of Industrial Production (IIP) in four months.
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.
Talking about the economy, Rajan said, growth is set to improve in the second half of this financial year on the back of expansion in the agriculture sector, exports and movement in stalled projects.

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