Reserve Bank of India stands pat; concerns for inflation outlook remain

The Reserve Bank of India kept its key policy rates on hold Tuesday. The bi-monthly policy statement mentioned the central bank has decided to keep the policy repo rate under the liquidity adjustment facility unchanged at 6.5 percent, the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities, and has decided to continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.

The RBI’s move was widely consistent with expectations, amid the sharper than seasonal-build up in food prices. India’s headline inflation is likely to be elevated in the next few readings, even if core inflation continues to be range-bound and downward sticky. Fluctuations in crude prices remain a worry for the inflation outlook.

But the central bank has drawn comfort from the healthy regional and temporal distribution of monsoon rains and the concomitant rebound in snowing activity, said ANZ in a research note. Price pressures are expected to abate as the kharif crop comes later in 2016. Also, the factors such as the increased post-monsoon rural demand and one-time payout of seventh pay commission arrears will start to feed into core inflation, added ANZ.

Liquidity conditions have turned out to be positive. This is attributed to certain seasonal factors. While easy liquidity conditions have urged banks to ease lending rates, it is quite vital to safeguard further transmission of past policy rate cuts to lending rates, according to ANZ.

The soon-to-be-formed Monetary Policy Committee is expected to continue to concentrate on inflation even beyond the current meeting and is expected to keep rates on hold this year.

“Our view is further strengthened given the government notification last week, extending the inflation target of 4 percent +/- 2 percent, for the next five years out to March 2021,” stated ANZ.