Highlights: RBI continues inflation fight, keeps policy rate, key ratios intact

RBI governor Raghuram Rajan continued his fight against inflation by holding its policy rate unchanged at 8 percent and reverse repo rate at 7 percent.

The central bank it its fourth bi-monthly policy review cautioned that there are upside risks to food inflation, despite the current softening trend.

Here are the key highlights from the statement.

* Upside risks to inflation from geopolitical tensions.

* “The full impact of the skewed rainfall distribution carries risks to the future path of food inflation, though vegetable prices have fallen recently after the recent spike… there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly,” the central bank said.

* Stability in exchange rate is entrenching disinflation.

* 8% January 2015 inflation target more within reach than in April.

* Inflation may climb back to 8% by January-March 2015.

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* Inflation will ease to 6% by November.

* GDP growth pick-up unlikely to sustain in next two quarters.

* Projects FY16 GDP growth at 6.3%.

* Retains FY15 GDP Growth Target At 5.5%.

* Since June, inflation ebbed to levels consistent withthe8percenttarget.

* Future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook, where lower oil prices, a relatively stable currency, and a negative output gap continue to put downward pressure.

* Going forward, as the investment cycle gathers momentum and overall demand picks up, banks will need to prepare to meet financing requirements as the credit cycle also turns. Equally, given the easy availability of foreign finance, corporations should be wary of being lulled by relative exchange rate stability and neglect to hedge foreign exchange liabilities.

* The future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6 percent by January 2016), while being contingent on incoming data.

* RBI says sharp pick-up in GDP growth during Q1 may not be sustained in Q2 and Q3.