Inflation hawk RBI: Repo rate remains at 8%, CRR stays at 4% :: Mint

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The Reserve Bank of India (RBI) on Tuesday kept the key policy rate unchanged, in line with expectations, citing risks of latent inflation.

The repo rate, or the rate at at which the central bank infuses liquidity into the banking system, remains at 8% and the cash reserve ratio (CRR), or the portion of deposits that banks must maintain with the central bank in cash, stays at 4%.

The last time RBI had touched the policy rate was on 28 January, when it increased the repo rate from 7.75% to 8%.

RBI also kept banks’ mandatory bond holding ratio unchanged at 22%.

The yields on the 10-year bond rose to 8.48% from its opening level of 8.49%. Just before the policy, the bond yield was at 8.471%. Rupee rose to 61.68 per dollar from its pre-policy level of 61.67. The rupee opened at 61.61 per dollar on Tuesday.

“With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialize rapidly,” RBI said in its policy statement.

The policy is in line with what RBI had communicated to the market on several occasions earlier, including in the policy review on 5 August.

The central bank had then indicated that it will keep its policy rates tight, even as inflation showed signs of some moderation, raising expectations that rates can be cut. RBI governor Raghuram Rajan made it clear in the post-policy interaction with the media that the central bank will tinker with the interest rates only when signs of sustainable low inflation were visible for the medium to long term.

The central bank’s immediate target is containing the consumer price index (CPI) inflation at 8% by January 2015, which looks achievable.

However, the next target is bringing the inflation to 6% by January 2016, which could be challenging, and analysts say Rajan’s eyes are firmly set on that target.

A rate cut at this point again risks stoking inflation. Rajan, who had said earlier that the central bank doesn’t want to keep fighting inflation every two years, called for breaking the back of inflation, on 25 September, few days before Tuesday’s monetary policy review.

The CPI inflation reading for August came at 7.8%, lower than July’s 7.96% but higher than June’s 7.46%. India’s gross domestic product (GDP) grew 5.7% in the quarter ended June, the fastest pace in two-and-a-half years and up from the March quarter level of 4.6%.

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