Raghuram Rajan refuses to budge, holds rate steady for now but may cut early 2015

The RBI today kept the policy rate steady, despite the shrill calls for a reduction from the government and the industry lobbies, as it felt “a change in the monetary policy stance at the current juncture is premature”.

Also it sees uncertainty on the inflation front after December when the benefit of high base effect wanes.

However, the central bank has softened its stance on inflation and cut the March-end inflation target to 6 percent.

“…If the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” the policy statement said.

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“Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through. Accordingly, the risks to the January 2016 target of 6 per cent appear evenly balanced under the current policy stance,” it said in the policy statement.

It has also noted that positive impact from the falling crude oil prices. “Risks from imported inflation appear to be retreating, given the softening of international commodity prices, especially crude, and reasonable stability in the foreign exchange market. Accordingly,
the central forecast for CPI inflation is revised down to 6 per cent for March 2015,” it has said.

The central bank held the repo rate, the rate at which it lends to banks, at 8 percent. Its reverse repo rate will also be retained at 7 percent. The key ratios - the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) - for bank have also been held steady.

The RBI’s action is line with the expectations as Governor Raghuram Rajan has made his intent to continue fight against inflation and inflation expectation.

There has been a let up in inflation expectations of the households too, it has noted.

Survey-based inflationary expectations have been coming down with the fall in prices of commonly-bought items such as vegetables, but are still in the low double digits, the statement said.