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RBI holds rates; may cut early 2015 if inflation weakens

Despite the steep fall in food inflation and continuously declining global crude oil prices, governor Raghuram Rajan feels that change in monetary policy stance at the current juncture is premature.

The News International Team

Reserve Bank of India (RBI) in its bi-monthly policy kept key interest rates unchanged on Tuesday. The repo rate, or the rate at which the central banks extends short-term loans to banks, stands at eight percent while the reverse repo rate is seven percent. The cash reserve ratio (CRR) remains at four percent. MSF and bank rate are unchanged at nine percent. This move is widely in-line with expectations of bankers, economists and market experts.

Despite the steep fall in food inflation and continuously declining global crude oil prices, governor Raghuram Rajan feels that change in monetary policy stance at the current juncture is premature. However, the central bank has sounded a slightly dovish note on its inflation outlook and cut the March-end inflation target to 6 percent from 8 percent earlier.

“Once we are at 6 percent inflation level, we are at the edges of a long-term target of 4 percent,” he adds.

Rajan, who has been on a war against inflation ever since he took office in September 2013, wants to make sure low inflation is ‘for real’ before taking any action on rates. Inflation in November is likely to soften further and in December it may rise due to base effect, adds the governor.

Hinting at lowering policy rates early next year, he says one is certainly seeing a disinflation process, but the central bank will keep an eye on the pace of disinflationary process before taking decision.

While Rajan acknowledges that the fiscal outlook should brighten courtesy softening crude prices, he feels that weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment.

Meanwhile, he continues to maintain India’s FY15 GDP growth target at 5.5 percent.

The next bi-monthly policy statement is on February 3, 2015.

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