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Rajan surprises yet again; leaves key rates unchanged

Faced with slowing growth and rising inflation, the Reserve Bank of India on Wednesday chose to keep its key policy rates unchanged in the mid-quarter monetary policy review.
However, RBI Governor Raghuram Rajan said that the central bank will take action outside the policy if food inflation does not soften.
In view of the high inflation, the market players and economists were expecting a hike of 25 basis points in the repo rate (the interest rate at which banks borrow overnight funds from RBI) to stem inflation.
Banks likely to maintain status quo
On Wednesday, the RBI kept its policy repo rate unchanged at 7.75 per cent; and the cash reserve ratio (CRR) unchanged at 4.0 per cent of net demand and time liability (NDTL).
With no change in key policy rates, banks are expected to keep deposit and lending rates unchanged.
In its statement, the RBI said the policy decision is a close one.
“Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of infIlation from its high current levels, and given the weak state of the 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,” it said.
BoB to wait & watch
According to the Bank of Baroda Chairman and Managing Director, S.S. Mundra, “It will be status quo (on deposit and lending rates) and we will wait-and-watch. Credit demand is subdued and liquidity is comfortable as of now.
However, he pointed out that if one of the two variables – liquidity becomes scarce or credit demand picks up – changes, only then the need will arise to review the interest rates.
PTI reports: 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 25 bps hike in the short-term lending rate.
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.
Since taking over as the RBI chief in September, Rajan had increased the key rate by 0.50 per cent in two instalments.
(This article was published on December 18, 2013)
Rajan surprises yet again; leaves key rates unchanged Reviewed by sambasivan srinivasan on 1:49:00 PM Rating: 5

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