RBI Monetary Policy:  Key Rates Unchanged

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While the financial markets and corporate India were eagerly waiting in anticipation for a cut in the repo rate on Tuesday morning, the Reserve Bank of India (RBI) decided to hold the rates. The CRR or the Cash Reserve Ratio (percentage of total bank deposits that must be kept with the RBI) remains unchanged at 4 percent. The repo rate (rate at which central bank lends to commercial banks) was held at 8 percent.

Speaking at a press conference on Tuesday afternoon, RBI chief Raghuram Rajan said that a change in the monetary policy stance at this point would be premature. The consumer price inflation rate (CPI) has been hovering around 6 percent over the last month, providing a much needed space for the RBI to work with (CPI was at 11 percent in November last year). However it must be noted that the inflation rates were soaring for the last four to five years and has come down only in the past two months.

The RBI made it clear that it would be comfortable with an inflation rate of 4 percent (with room for plus or minus 2 percent). Citing ambiguity on the recent inflation figures, Mr.Rajan said that although the disinflationary process is clearly visible, he and his team want to make sure that the low inflation is real and can be sustained over a long period of time. It is looking for more information on domestic and world developments before it takes a decisive and positive action.

Mr. Rajan said that the RBI does not react to every development that occurs at the domestic and global front. It must be noted that across the globe, the way to sustainable growth is moderate inflation. In order to maintain moderate inflation over the long run, a well defined framework must be created.

The governor refused to specify a month when he would be open to changes in key rates. However, he did point out that if things continue to move in the same positive direction, the RBI may act in early 2015.

While many people in the market might be disappointed with the RBI’s stance, the governor and his team must be commended for their consistent monetary policy stance thus ensuring clarity for investors and the government. The central bank of any successful economy always ensures that it does not flip-flop on policy decisions time and again. This is exactly what the RBI is refraining from. Not taking an action is also an action and sometimes it proves to be the most effective decision.  However, Mr. Rajan is known to have always surprised the market and as we enter 2015 we can expect some changes in the monetary policy stance. A cut of at least 25 basic points can be expected in the repo rate and CRR. This will ensure liquidity in the market for the coming calendar year.

The Indian economy has been under pressure to emerge victorious from its slowest period of economic growth since the 1980’s. Hence any kneejerk reaction by the RBI would be untimely and unnecessary. With oil prices falling and the CPI rate declining, the macro-economic indicators are showing positive signs of improvement. Whether this encouraging set of circumstances sustains in the long run is to be seen.

Somesh Chandran

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