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Last updated: 30 Sep, 2014  

rbi_thumb.jpg RBI keeps key interest rates unchanged

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SME Times News Bureau | 30 Sep, 2014
In its fourth bi-monthly monetary policy, the Reserve Bank (RBI) Tuesday kept key interest rates unchanged in a bid to maintain financial and price stability. The Indian equities markets did not react much to the status quo, which India Inc. said was expected.

Saying the country is currently positioned to reach the central bank's inflation target of 6 percent by January 2016, RBI Governor Raghuram Rajan decided to keep the lending rate, or the repo rate, unchanged at 8 percent, while it retained the short-term borrowing, or reverse repo rate, at 7 percent and the cash reserve ratio (CRR) at 4 percent.

"We've said (in Tuesday's review) that we are currently positioned to reach 6 percent (inflation rate) by 2016 January, given where the rate is," the monetarist-inclined Rajan told reporters here after the rates were announced.

Consumer price index (CPI) -based retail inflation eased to 7.8 percent in August from 8.59 percent in April. Wholesale price index (WPI) inflation has also eased to 3.74 percent in August from 5.55 percent at the start of the current fiscal.

The RBI has set a target for CPI inflation at 8 percent by January 2015 and 6 percent by January 2016.

The central bank has retained the economy's growth projection for current fiscal at 5.5 percent and said the future policy stance will be influenced by the inflation outlook.

The status quo in these key policy rates mean the equated monthly instalments (EMIs) on home, auto and other loans would remain unchanged as these rates determine lending and borrowing rates of the commercial banks.

A cut in these rates would have also reduced the cost of accessing funds for lending institutions.

Moreover, it would have eased money supply in the financial system by making it more attractive for commercial banks not to park their funds with the RBI in the form of government securities, and instead lend them for commercial purposes.

The apex bank kept the repo rate, or the interest that banks pay when they borrow money from the RBI to meet their short-term fund requirements, unchanged at 8 percent.

The reverse repo rate, or the interest that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been adjusted to 7 percent.

The Cash Reserve Ratio (CRR) is left unchanged at 4 percent. The marginal standing facility rate and the Bank Rate is also kept unchanged at 9 percent.

The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, has been maintained to 22.0 percent of their net demand and time liabilities (NDTL).

The central bank's move is on the expected lines as most analysts predicted a status quo, considering the macro-economic situation and current data.

India Inc. too said it expected the status quo.

The Confederation of Indian Industry (CII) said the RBI should guard against the anticipation of upside risks emerging from inflationary expectations.

"By all indications, the twin deficits - fiscal and current account are well under control and core inflation has been trending downwards, while on the other hand, industrial production has been muted. This could have been a good opportunity for the RBI to reduce rates," said Chandrajit Banerjee, director general, CII, in a statement.

"The onset of the festive season is also likely to spur demand for consumer goods. The infusion of liquidity at this juncture, through a reduction in policy rates, would have provided an impetus to the feel good factor brought on by the recent burst of policy announcements made by the government," he added.
 
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