Despite the recent surge in both retail and wholesale inflation, India's central bank Wednesday kept key policy rates unchanged in a bid not to weaken growth, but warned it will act swiftly if the situation does not improve.
The decision was taken during the mid-quarter review of India's monetary policy for the current fiscal undertaken by Reserve Bank of India Governor Raghuram Rajan at the Mint Road headquarters of the central bank here.
The decision was welcomed by the markets and industry. The sensitive index (Sensex) of the Bombay Stock Exchange, which had opened slightly weak at 20,568.70 points, against Tuesday's close at 20,612.14, rose immediately after the policy update.
After hitting a high of 20,917.57 points, it was ruling at 20,825.81 points with a gain of 213.67 points, or 1.04 percent. All sectoral indices were also in the green. The index reflected the industry mood too, as there was an apprehension of a rate hike.
"The policy decision is a close one. Current inflation is too high," Rajan said in a statement, adding that because of uncertainty in near-term prices and the weak state of the economy, the Reserve Bank was opting not to be "overly reactive" with policy action.
The governor also cautioned that the central bank will act, that too without waiting for the next round of monetary policy update, if inflation does not fall significantly in a bid to tame prices and make the environment conducive for sustainable growth.
Rajan said the marginal improvement in the country's gross domestic product (GDP) growth in the second quarter of this fiscal was more to do with a better farm output as factory output remained sluggish. Headwinds to improve growth remained.
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"In this context, the revival of stalled investment, especially in the projects cleared by the Cabinet Committee on Investment will be critical," the governor said putting the ball in the central government's court to improve the investment climate.
"There are actions government can take on the supply-side issues. I think there has been some movement by the government, for example on releasing wheat stocks," he said during a press conference later on the issue of inflation.
"But can more action been taken both by the central and state governments in bringing down food prices? That would help in the overall inflationary environment."
As a result of Wednesday's policy update:
- The repurchase, or the short-term lending rate, remains unchanged at 7.75 percent
- The cash reserve ratio, or the money commercial banks have to retain in cash and other liquid assets, also remains untouched at 4 percent
- Consequently, the reverse repo rate, or the short-term borrowing rate, is also left untouched at 6.75 percent.
"The Reserve Bank of India (RBI) has demonstrated restraint and foresight to strike the right balance between inflation and growth," the Confederation of Indian Industry (CII) said in a statement, reacting to the policy update.
"While being fully cognizant of the imperatives of anchoring inflationary expectations, CII is of the view that in the coming months, owing to a good agricultural performance, the prices of food items would moderate," the chamber said.
"CII has maintained that the current spike in inflation is a supply side phenomenon and therefore, a tight monetary policy would hurt growth while proving unequal to the task of tackling inflation."