The Telegraph
Wednesday , April 2 , 2014
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Permit push in pause period
RBI keeps key rates unchanged

RBI governor Raghuram Rajan with deputy governors K.C. Chakraborty (left), Urjit Patel (second from left) and H.R. Khan (right) in Mumbai on Tuesday. (PTI)

Mumbai, April 1: The Reserve Bank of India today left the key policy rate unchanged but said that it would not resort to monetary tightening in the near-term if retail inflation slithered along an intended glide path.

The status quo on the repo rate will mean that equated monthly instalments (EMIs) on home and car loans will not go up.

The repo which is the rate at which the RBI provides short-term liquidity to banks stays pegged at 8 per cent. The cash reserve ratio will also stand pat at 4 per cent. The CRR is the amount that banks must keep with the central bank and is calculated in relation to a bank’s total deposits.

RBI governor Raghuram Rajan, who has surprised the Street with three interest rate hikes since September, didn’t wrong foot the markets this time. The dominant view on the Street was that the central bank would not tweak the repo rate in its first bi-monthly monetary policy statement.

“At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy,” Rajan said while explaining the reasons behind the status quo in today’s policy.

The three rate hikes of 25 basis points each were designed to tame inflation.

In January, RBI deputy governor Urjit Patel had advised the central bank to track inflation based on consumer price index. He had also suggested a glide path that would take retail inflation down to 8 per cent by January 2015 and 6 per cent by January 2016 and eventually to around 4 per cent.

Although CPI inflation for February at 8 per cent is closer to this glide path, the RBI struck a mildly hawkish tone when it came to prices.

The apex bank said there were risks to the central forecast of 8 per cent CPI inflation by January 2015 arising from a less-than-normal monsoon because of a possible El Nino effect, uncertainty on the setting of minimum support prices for agricultural commodities and the setting of other administered prices, particularly that of fuel, fertiliser and electricity among others.

El Nino is a phenomenon that is characterised by warm ocean water temperatures off the Pacific coast of South America that triggers extreme climate change patterns that can trigger droughts, floods and poor crop yields in varying regions of the world, including India.

The RBI added that though retail inflation in Feburary came lower because of a sharp disinflation in food prices, prices of fruits, milk and products have started to firm up. Further, if one were to exclude food and fuel (core inflation), retail inflation remains sticky at around 8 per cent, suggesting that some demand pressures were still at play.

Experts maintain that this indication from the RBI means that there could be more tightening down the road.

“Going forward, the RBI may be in a wait-and-see mode for a while longer as it monitors the transmission of the previous hikes in monetary policy and the extent to which the upside risks to inflation materialise or not. However, this does not mean that we have hereby reached the end of the tightening cycle. If the RBI wants to bring inflation down to 6 per cent and lower from January 2016, monetary policy has to be tighter than it is now,” Leif Eskesen, HSBC’s chief economist for India and the Asean region, said in a note.

The RBI pegged 2014-15 GDP growth at a central estimate of 5.5 per cent. It further projected that the 2013-14 current account deficit would be about 2 per cent of GDP.

The bi-monthly monetary policy statement saw the RBI making some changes to the liquidity adjustment facility (LAF) — the mechanism that enable banks to manage their liquidity position. This is done through repo (banks borrow from the RBI window) and reverse repo (when banks lend to the RBI).

The RBI reduced banks’ access to overnight repos by bringing down the liquidity provided under overnight repos under the LAF from 0.5 per cent of bank deposits to 0.25 per cent. However, it raised the liquidity provided under seven-day and 14-day term repos from 0.5 per cent to 0.75 per cent to encourage banks to tap the term repo facility rather then the overnight facility.


Monetary stance

  • No change in repo rate (8%) and cash reserve ratio (4%)
  • RBI halves overnight call money rate to 0.25% and increased the 7-day and 14-day repo limits to 0.75% from 0.50%, respectively

The guidance

  • Economic growth pegged at 5.5% for 2014-15
  • CAD expected to come down to 2% of GDP in 2013-14
  • Retail inflation seen to be under 6% in 2014
  • No rate hike if inflation continues to trend lower

On banks

  • RBI open to banking mergers, provided competition and stability are not compromised
  • RBI asks banks not to charge penalty for failure to maintain minimum balance in inoperative account
  • RBI to increase financial services reach by using technology and new products

Next bi-monthly review: June 3