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RBI keeps rates unchanged but 6% inflation target at risk

The RBI Governor Raghuram Rajan stayed put on the key policy rates in his fourth bi-monthly credit policy review today but sounded caution as far as meeting 2016 inflation target was concerned.

The Reserve Bank of India Governor Raghuram Rajan stayed put on the key policy rates in his fourth bi-monthly credit policy review today, but maintained his hawkish tone in determining the inflation trajectory going forward. The RBI now believes that attaining the projected inflation target of 6 percent by 2016 is at risk.

Speaking to press shortly after announcing the policy, governor Rajan said the headline inflation has been buffetted slightly, the risks are still towards the upside; hence reaching 6 percent inflation target by 2016 too is at risk.

“Large and persistent upside pressures on food prices have resulted in their contribution rising to almost 60 percent of headline inflation in August. The full impact of the skewed rainfall distribution carries risks to the future path of food inflation…Future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook where lower oil prices, a relatively stable currency, and a negative output gap continue to put downward pressure. Base effects will also temper inflation in the next few months only to reverse towards the end of the year. The Reserve Bank will look through base effects,” the policy statement noted.

Meanwhile, key policy rates were left unchanged, which was on the expected lines. Repo rate or the rate at which RBI lends money to banks for short-term, stayed at 8 percent while the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities. Consequently, the reverse repo rate remains unchanged at 7 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 9 percent.

The RBI also kept the statutory liquidity ratio (SLR) of scheduled commercial banks unchanged at 22 percent of their NDTL.

The fifth bi-monthly monetary policy statement is scheduled on Tuesday,
December 2, 2014.

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