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India's central bank keeps policy rates unchanged

Publication Date : 02-04-2014

 

Interest rates on bank loans are likely to remain unchanged after the Reserve Bank maintained the current key policy rates.

The Reserve Bank of India (RBI) , in its first bi-monthly monetary policy statement, left the short-term lending rate, or repo rate, unchanged at 8 per cent and the cash reserve ratio at 4 per cent.

Targeting the retail inflation based on consumer price index remains the credo of the country's central bank and its credit and monetary policy stance as is evident in today's review statement released by RBI Governor Raghuram Rajan.

Confirming that the CPI faces upside risk, the Governor said the central bank had thought it prudent to retain all benchmark policy rates and continue keeping an eye on the movement of the consumer price index until the next policy statement on 3 June 2014. For the time being, he said: "The policy rates are set appropriately requiring no revision."

The steady policy stance reflected in unchanged interest rates has been interpreted in certain quarters as "hawkish" since the RBI continues to ensure the CPI or retail inflation does not surpass its comfort level.

The RBI Governor factored two additional concerns that might need to be confronted in the near future. First is the uncertain outcome of the Parliament election and the second is the spectre of El Nino that may loom large disrupting a normal monsoon.

Rajan explained: "Have to be ready for turmoil, if any, from election outcome although markets are anticipating a stable government and rapid policy action." He said there was reason to be wary about the monsoon vagaries in case El Nino would disturb the normal rainfall.

"There are risks to the central forecast of 8 per cent CPI inflation by January 2015 stemming from a less than normal monsoon due to possible El Nino effect, uncertainty on the setting of minimum support prices for agriculture commodities and the setting of other administered prices, especially of fuel, fertilizers and electricity, the outlook for fiscal policy, geo-political developments and their impact on international commodity prices," The Governor said explaining the El Nino impact.

However, the RBI has predicted GDP for FY 2014-15 at 5 per cent.

"The country's potential is restricted below 6 per cent under current circumstances," the RBI's economic survey released with today's monetary and credit policy says.
The current account deficit for the FY 2014 is expected at 2 per cent of the GDP. The RBI policy warns about downside risk to growth after January 2015.

The RBI chief confirmed that he had written to the Election Commission of India seeking clearance to issue new bank licences that have been pending for some time now.

The RBI has sought EC's clearance only to protect the announcement from political controversy.

"Giving bank licences is not in any way a political process. It is an economic and regulatory process and therefore seen as distant and different... we have to undertake what we have to undertake.I think one should respect all political opinions that are expressed," the central bank governor said.

"The RBI is satisfied with the liquidity in the financial system... Financial markets will have more flexibility in liquidity management facilities offered by the central bank. Besides there will be risk protection for investments in corporate debts... One may look forward to more banks with specific functions since the RBI will actively consider differentiated licences."

However, the RBI Governor underlined the need for a check on 'window dressing' by commercial banks that often compels the money market regulator to tighten liquidity measures.

 

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