RBI Keeps Key Rates Unchanged; Indicates Rate Cuts In Jan. Review

The Reserve Bank of India in an unexpected move decided to keep the key interest rates and cash reserve ratio unchanged in its mid-quarter monetary policy, citing the fragile global economic situation but said the policy focus was shifting towards growth, indicating monetary easing in the next quarter review.

It was widely expected that RBI will cut the cash reserve ratio to increase the liquidity and would keep the repo rates unchanged. There were increased demands from the industry and the government to cut the key interest rates to boost growth as the economy had shown signs of turnaround in November with headline inflation cooling down and the industrial production picking up.

However, the RBI in its press release stated that it is keeping the Cash Reserve Ratio (CRR) unchanged at 4.25 percent, policy repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 8.0 percent and the reverse repo rate under the LAF unchanged at 7.0 percent, the Marginal Standing Facility (MSF) and the Bank Rate unchanged at 9.0 percent.

Although the global economy has shown signs of stabilization, with activity picking up in the U.S., the overall situation remains fragile, as euro zone weakness persists, the Central Bank said. On domestic front also, the GDP growth has remained below its projected path and inflation though moderated remains above comfortable levels.

“The seasonally adjusted three-month moving average annualised momentum indicator also points to ebbing of inflationary pressures. However, in striking contrast to wholesale inflation developments, retail inflation remained elevated,” the Bank said in a statement.

“The new combined (rural and urban) CPI inflation increased in November, reflecting sustained food inflation pressures, particularly in respect of vegetables, cereals, pulses, oils and fats. The non-food component of the index also suggested persistent inflationary pressures,” it added.

Nevertheless, RBI said that economy is showing positive signs and the focus of the policy was shifting towards growth.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth as stated in the SQR, thereby preparing the ground for further shifting the policy stance to support growth," RBI Governor D Subbarao said in the mid-quarter monetary policy review.

Some economists believe that the move was expected and it indicates a rate cut in its first quarter policy review in 2013. The RBI is slated to announce the third quarter policy review on Jan. 29.

India rupee crossed 55 levels against the dollar following the RBI decision to keep key rates unchanged. At 3.30 p.m., the Indian unit was trading at 54.99 rupee after touching a low of 55.05 rupee against the greenback.