In its fourth bi-monthly monetary policy, India's central bank Tuesday kept key interest rates unchanged in a bid to maintain financial and price stability with Governor Raghuram Rajan saying further policy will be contingent on relevant data coming in.
Saying the country is currently positioned to reach the Reserve Bank of India's inflation target of 6 percent by January 2016, Rajan said it was decided to keep the lending rate, or the repo rate, unchanged at 8 percent, the short-term borrowing, or reverse repo rate, at 7 percent and the cash reserve ratio (CRR) at 4 percent.
"We've said (in Tuesday's review) that we are currently positioned to reach 6 percent (inflation rate) by 2016 January, given where the rate is," the monetarist-inclined Rajan told reporters here after the rates were announced.
Consumer price index (CPI) -based retail inflation eased to 7.8 percent in August from 8.59 percent in April. Wholesale price index (WPI) inflation has also eased to 3.74 percent in August from 5.55 percent at the start of the current fiscal.
The RBI has set a target for CPI inflation at 8 percent by January 2015 and 6 percent by January 2016.
It has retained the economy's growth projection for current fiscal at 5.5 percent and said the future policy stance will be influenced by the inflation outlook.
The status quo in these key policy rates mean the equated monthly instalments (EMIs) on home, auto and other loans would remain unchanged as these rates determine lending and borrowing rates of the commercial banks.
The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, has been maintained to 22 percent of their net demand and time liabilities (NDTL).
Given that inflation is expected to level at around 7 percent by 2016, the RBI's monetary policy ahead will be contingent on relevant data coming in.
".. the risks are still to the upside. If the data come in and say that we are going to miss the 6 percent inflation target, we will have to tighten and if the data say we are going to do better than 6 percent or earlier than January, we will be more accommodative," Rajan said.
The RBI had first mentioned the upside risks at the August policy review.
"We are a little better than we were in August, but there are still risks in achieving the 6 percent target," he said.
Citing the impact of various disinflationary forces, like low oil prices, stable exchange rates and a softening in rural wages growth, he said: "There are uncertainties still, for instance on how food inflation has evolved. Headline (inflation) is still buffeted by food inflation."
On the SLR, which goes up to 5 percent from 2 percent, Rajan said the intention is to give banks with liquid securities the required flexibility in management.
He also said that as government finances improve, the SLR will be brought down further. In the past two policies, the RBI had reduced SLR to 22 from 23 percent.
The Indian equities markets did not react much to the status quo, which India Inc. said was expected. Analysts said the markets had factored in the eventuality of the RBI holding policy rates.
In fact, the benchmark index of Indian equities markets made gains. It was trading up 113.52 points or 0.43 percent.
Healthy buying was observed in consumer durables, automobile, capital goods, healthcare and bank stocks.
The Confederation of Indian Industry (CII) said the RBI should guard against the anticipation of upside risks emerging from inflationary expectations.
"By all indications, the twin deficits - fiscal and current account are well under control and core inflation has been trending downwards, while on the other hand, industrial production has been muted. This could have been a good opportunity for the RBI to reduce rates," CII director general Chandrajit Banerjee said in a statement.
A.Didar Singh, secretary general of industry chamber Ficci, said: "The policy is on expected lines as a rate cut was not on the cards. Although the upside risks to inflation have eased, the RBI has chosen to take a cautious stance given the geo-political risks that could have a bearing on oil prices and the lagged full impact of skewed rainfall which could impact food prices going ahead."
