As expected, Reserve Bank of India (RBI) Governor Raghuram Rajan today kept the repo rate unchanged since retail inflation still remains 'sticky', but introduced steps to increase liquidity and contain volatility in the money market.
The RBI, in its first bimonthly monetary policy statement, left the short-term lending rate or repo rate unchanged at 8 per cent and the cash reserve ratio static at 4 per cent. It halved the overnight call money rate to 0.25 per cent and increased the 7-day and 14-day repo limits to 0.75 per cent from 0.50 per cent.
Also read: Raghuram Rajan's full speech
"At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy," said Raghuram Rajan, who had in previous policy announcements surprised the markets with policy rate changes.
If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, the Governor promised there won't be any rate hikes.
On liquidity moves, Raghuram Rajan said the primary objective is to improve transmission of policy impulses across the interest spectrum and improve liquidity in the system.
"The term repo has evolved as a useful indicator of underlying liquidity conditions. It also allows market participants to hold liquidity for a longer period...evolving market-based benchmarks for pricing various financial products," he said.
On inflation, the Governor said he sees retail inflation softening in 2014 to under 6 per cent.
"Excluding food and fuel...retail inflation remained sticky around 8 per cent. This suggests that some demand pressures are still at play," he said.
The RBI pegged 2014-15 GDP growth at a central estimate of 5.5 per cent. It said the FY14 current account deficit would be about 2 per cent of GDP.
"Most recently, export growth has slowed partly because of slowdown in demand in partner countries as well as a softening of prices of exports of petroleum products and gems and jewellery (offset by a reduction in the prices of oil and gold imports)," Rajan said.
"Whether the export slowdown persists as global growth picks up once again remains to be seen. In February, there was a turnaround in portfolio flows as investors largely priced in the effects of taper by the US Fed and responded to economic and geo-political developments in emerging markets with re-allocations," he added.
On liquidity, he said the central bank will continue to monitor conditions and ensure adequate flow of credit to the productive sectors.
"Liquidity conditions have tightened in March, partly on account of year-end window dressing by banks, though an extraordinary infusion of liquidity by the Reserve Bank has mitigated the tightness," he said.
The Reserve Bank will propose measures to reduce such practices, he added.
Bank of Baroda Executive Director Rajan Dhawan said the RBI will wait for additional data before deciding on the next policy.
According to State Bank of India Managing Director P Pradeep Kumar, the RBI's next policy would be data driven.
The second bimonthly monetary policy statement is scheduled to be announced on June 3.
Monetary policy review: Guv Raghuram Rajan keeps RBI rates unchanged
(Reuters) Governor Raghuram Rajan-led Reserve Bank of India (RBI) left its policy interest rate unchanged on Tuesday, as expected, and said it does not expect further near-term policy tightening if headline inflation continues to ease towards the bank's targeted level.
RBI indicated today that it will announce in-principle approval of new bank licences after consulting Election Commission.
However, Raghuram Rajan added that RBI to give bank licences on tap.
Also see: Raghuram Rajan's full speech
While inflation is a concern, Raghuram Rajan said he was not moved by vegetable prices.
The RBI kept its key repo rate at 8.00 percent, in line with the forecast of all 53 economists in a poll last week.
Since taking office in September, RBI Governor Raghuram Rajan has raised the repo rate three times by a total of 75 basis points.
India's consumer price index inflation eased to 8.10 percent in February, near the RBI's January 2015 target of 8 percent, while the wholesale price index slowed to a 9-month low of 4.68 percent.
The RBI wants CPI inflation to ease further to 6 percent by January 2016.
"The Reserve Bank's policy stance will be firmly focused on keeping the economy on a disinflationary glide path," Raghuram Rajan said.
"If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture," he said in his policy statement.
Raghuram Rajan expressed concern about risks to growth in an economy expanding at under 5 percent, its slowest in a decade. He said growth in the fiscal year that began this month is expected in a range of 5 to 6 percent, with downside risks.
"Lead indicators do not point to any sustained revival in industry and services as yet," Rajan said.
The RBI also reduced the availability of overnight funds from its repo window for banks and increased the amount that banks may borrow from its term repo window in a bid to reduce lenders' reliance on short-term central bank funding.
Indian stocks were little changed, while the local bond and foreign exchange markets were closed on Tuesday.
With India heading for elections running from April 7 to May 12, Rajan had been expected to wait for a glimpse of the next government's economic policies as well as the outlook for monsoon season rains that begin in June before making a policy move, economists said.
"With upcoming elections adding another event risk to the horizon along with the likelihood that poor weather conditions might feed into inflation yet again, the prudent bias will be to maintain the tight hold on policy levers," Radhika Rao, economist at DBS in Singapore, said after the policy statement.
* Raghuram Rajan says RBI will change incentive structure for banks
* RBI rate appropriately set for now
* Industrial activity a concern
* Export growth slowed
* To provide sufficient liquidity
* To reduce access to overnight repos
* New combined CPI accepted
* Outlook for monsoon uncertain and that means risk for inflation rises: RBI
* No further tightening in near term: RBI
* Have to be prepared for spike in volatility: RBI
* Markets anticipating a stable govt post-Lok Sabha elections: RBI
* RBI asks banks not to charge penalty from depositors for not maintaining min balance
* RBI expects retail inflation to be under 6 per cent during 2014.
* RBI keeps short-term lending (repo) rate unchanged at 8 per cent.
* RBI pegs economic growth for 2014-15 at 5.5 per cent.
* Current account deficit CAD) expected to come down to 2 per cent of GDP in 2013-14: RBI