RBI keeps rates as is, says 2016 CPI target of 6% at risk

RBI keeps rates as is, says 2016 CPI target of 6% at risk The RBI Governor Raghuram Rajan stayed put on the key policy rates in his fourth bi-monthly credit policy review today but sounded caution as far as meeting 2016 inflation target was concerned. The apex bank retained the growth projection for FY15 at 5.5 percent and forecasts FY16 growth at 6.3 percent. 1 Comments (6) Moneycontrol Bureau The Reserve Bank of India Governor Raghuram Rajan stayed put on the key policy rates in his fourth bi-monthly credit policy review today, but sounded caution as far as meeting the 2016 CPI target was concerned. The RBI now believes that attaining the projected inflation target of 6 percent by January 2016 is at risk due to expected "food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly." Speaking to press shortly after announcing the policy, governor Rajan said the headline inflation has been buffetted slightly, but the risks are still towards the upside; hence reaching 6 percent inflation target by 2016 too is at risk. “The future policy stance will be influenced by the RBI’s projections of inflation relative to the medium term objective of 6 percent by January 2016, while being contingent on incoming data,” Rajan said. He said it would be rather easy to meet the 8 percent CPI target for 2018. "Large and persistent upside pressures on food prices have resulted in their contribution rising to almost 60 percent of headline inflation in August. The full impact of the skewed rainfall distribution carries risks to the future path of food inflation...Future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook where lower oil prices, a relatively stable currency, and a negative output gap continue to put downward pressure. Base effects will also temper inflation in the next few months only to reverse towards the end of the year. The Reserve Bank will look through base effects," the policy statement noted. Meanwhile, key policy rates were left unchanged, which was on the expected lines. Repo rate or the rate at which RBI lends money to banks for short-term, stayed at 8 percent while the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities. Consequently, the reverse repo rate remains unchanged at 7 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 9 percent. The RBI also kept the statutory liquidity ratio (SLR) of scheduled commercial banks unchanged at 22 percent of their NDTL. The apex bank also retained the growth projection for FY15 at 5.5 percent and forecasts FY16 growth at 6.3 percent. It said the quarterly growth path may slow mildly in Q2 and Q3 before recovering in Q4. The RBI also noted that liquidity presurres have eased since credit growth fell well below deposit growth in August and September. However, despite liquidity conditions remaining comfortable and deposit growth remaining normal, non food credit growth decelerated in September 2014, the lowest level since June 2001. The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December 2, 2014. Posted by Jhini Sinha Phira