To rein in inflation, RBI keeps major rates unchanged

Rates unchanged due to risks from food price shocks and geopolitical developments that could materialise rapidly, says RBI governor Raghuram Rajan

GN BUREAU | September 30, 2014


RBI governor Raghuram Rajan
RBI governor Raghuram Rajan

As anticipated by the economists and market leaders, Reserve Bank of India (RBI) in its fourth bimonthly monetary policy statement left untouched all major rates affecting the economy.

In its policy statement released today (September 30), the apex bank stated that on the basis of an assessment of the “current and evolving macroeconomic situation”, repo rate under the liquidity adjustment facility (LAF) has been kept unchanged at 8 percent. Also, the cash reserve ratio (CRR) of scheduled banks is kept unchanged at 4 percent of net demand and time liabilities (NDTL).

Further, the reserve repo rate under the LAF will remain unchanged at 7 percent, and the marginal standing facility (MSF) rate and the bank rate at 9 percent.
By leaving all the major rates unchanged, the RBI has made it clear that it is not going to allow any cuts in the interest rates until it is confident of controlling the consumer inflation and bringing it down to 6 percent – the target set by RBI – by January 2016.

Talking about the reason behind keeping the major rates unchanged, RBI governor Raghuram Rajan said, “There are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geopolitical developments that could materialise rapidly.”

The decision of keeping the rates unchanged has not been fully appreciated by the industry.

Commenting on RBI’s decision, Chandrajit Banerjee, director-general, Confederation of Indian Industry ( CII)  said, “RBI’s decision to maintain status quo on policy rates is not fully unexpected as in the growth-inflation dilemma, the concern is to guard against the anticipation of upside risks emerging from inflationary expectations.”

However, he added, “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.”
According to a statement issued by the CII today, industrial sector is at the threshold of the busy credit season when the demand for bank credit is anticipated to go up and with the festive season demand for consumer goods is likely to increase.

In this context, the “infusion of liquidity at this juncture, through a reduction in policy rates, would have provided an impetus to the feel good factor brought on by the recent burst of policy announcements made by the government”, read the CII statement.

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