In line with market expectations, RBI raised repo and reverse repo rates by 25 basis points, keeping the cash reserve ratio unchanged. RBI also stated low possibility of a rate rise in the near future. Inflation continues to be an important concern, and anchoring inflationary expectations without hurting growth remains a great challenge for the monetary policy, given its structural nature.
In what seems to be a careful balancing act between growth and inflation, RBI has signalled a pause in the relentless pursuit of monetary tightening that started last October with an increase in the statutory liquidity ratio (SLR) to 25 per cent. RBI has indicated confidence in the sharp and broad-based recovery of the Indian economy.
The gross domestic product (GDP) growth forecast by RBI stays firm at 8.5 per cent. The increase in lending rates and liquidity tightness is consistent with RBI’s monetary stance. The central bank has highlighted the risk of asset prices rising to the pre-crisis levels. Large capital flows beyond the capacity of the economy pose a challenge for exchange rate and monetary management and RBI will continue to monitor these closely. In addition, RBI has mentioned that the uncertainty in the global markets warrants the flexibility to take required policy actions at shorter intervals in spite of expectations that further rate rises might not be necessary in the near future. The current tightness in liquidity conditions is likely to continue, thereby increasing the effectiveness of policy action in reining in inflationary pressures.
