Reserve Bank keeps key policy rates unchanged

MUMBAI: Reserve Bank of India governor Raghuram Rajan left key policy rates unchanged in his sixth bi-monthly monetary policy review on Tuesday. The governor has said that higher wages following implementation of the seventh central pay commission would provide upward pressure to prices.
In his statement, the governor once again warned the government against breaking away from its fiscal deficit targets. "The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened," said Rajan in his policy statement.

Following the announcement the repo rate (the rate at which Reserve Bank of India lends to banks) stands unchanged at 6.75%. The cash reserve ratio (CRR) - the portion of deposits that banks are required to mandatorily park with RBI - also remains unchanged at 4.0% of net demand and time liability (deposits in fixed, savings and current accounts). The statutory liquidity ratio - the percentage of deposits that banks have to invest in liquid government bonds - continues to be 21.5% of deposits.

Economists and analyst had widely forecast that Rajan would maintain a status quo in today's policy. Most bankers expected that the governor would wait for further clarity on the government stand on sticking to its targets on spending. However, even those who did not expect a rate cut felt that there was scope for at least a 50 basis point cut in interest rates during the year. Following Tuesday's statement most expect that there is still scope for one more cut. However, the governor seems to have made this conditional to the government sticking to its deficit targets.