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Tuesday 30 September 2014

At RBI policy review, Raghuram Rajan leaves interest rates unchanged at 8%

Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday kept key rates unchanged in its fourth bi-monthly monetary policy.
 
It kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.% and the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL); said that since June, headline inflation has ebbed to levels which are consistent with the desired near-term glide path of disinflation -- 8 per cent by January 2015.

"The most heartening feature has been the steady decline in inflation excluding food and fuel, by a cumulative 111 basis points since January 2014, to a new low," the central bank said in a statement.

It added that with international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. However, it said that 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 materialise rapidly.

RBI said that turning to the medium-term objective (6% by January 2016) the balance of risks is still to the upside, though somewhat lower than in the last policy statement. It said that this continues to warrant policy preparedness to contain pressures if the risks materialise.

Therefore, it said that the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data.

RBI also said that in order to further develop the government securities market and enhance liquidity, it has been decided to bring down the ceiling on SLR securities under the held to maturity (HTM) category from 24% of NDTL to 22% in a graduated manner i.e. 23.5% with effect from the fortnight beginning January 10, 2015, 23.0% with effect from the fortnight beginning April 4, 2015, 22.5% with effect from the fortnight beginning July 11, 2015 and 22.0% with effect from the fortnight beginning September 19, 2015.  

A Business Standard poll had indicated that the current financial year might end up being the first in seven years to see the Reserve Bank of India (RBI) keeping the benchmark repo rate unchanged.

As many as nine respondents — all leading names in the public sector, private and foreign banks, as well as other financial intermediaries — said RBI would hold the repo rate at eight per cent at least until the end of March 2015.
Most respondents explained why they did not expect a rate change by saying though the retail inflation rate, the RBI’s new benchmark, had fallen below eight per cent, the target of achieving a 6% rate was a big challenge.

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