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Rajan surprises everyone yet again; leaves rates unchanged

Mumbai, Dec 18 (PTI): Reserve Bank of India Governor Raghuram Rajan surprised the markets on Wednesday by leaving all key policy rates unchanged, notwithstanding persistent high inflationary pressure.

The short-term lending rate was kept unchanged at 7.75 per cent, while the cash reserve ratio (CRR) remained at 4 per cent in the RBI’s mid-quarter monetary policy review.

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 basis point hike in the short-term lending rate.

The RBI said it would take “calibrated action” in the future, based on inflationary trends and action by the US Federal Reserve.

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 50 basis points in two instalments.

Shifting his stance to promote growth from inflation management, Rajan said continuing weakness in growth was the main driver of his policy action.

The stock markets reacted positively and the S&P BSE Sensex shot up 140 points to 20,852 immediately after the policy was announced.

State Bank of India Chairperson Arundhati Bhattacharya said the bank would not contemplate cutting deposit rates as ”it really hurts the depositors and we would not like to do that.”

She pointed out that the SBI’s rates are still higher than what they were on July 15, and the bank has no plan for a rate cut.

“In view of the fact that liquidity is ample in the system, we will definitely be looking at the rates and we will try to see if something needs to be done...may be for the bulk (depositors) we might look at doing something,” she said.

The chairman of the Prime Minister's Economic Advisory Council (PMEAC), C Rangarajan, a former RBI governor himself, said “It is a difficult balancing act...I certainly think that the priority to RBI is price stability and therefore they should keep continuous watch on what is happening to inflation.”

While retail inflation soared to a nine-month high of 11.24 per cent in November, the index based on wholesale prices zoomed to a 14-month high of 7.52 per cent last month.

Analysts are of the opinion that inflation has peaked and will ease from December as food prices cool on better supplies with winter crops coming in.

Rajan, however, sounded cautious when he 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 inflation from its high current levels, and given the weak state of the economy...there is merit in waiting for more data to reduce uncertainty.”