RBI keeps key policy rates, CRR unchanged

At present, repo rate stands at 7.25%, CRR at 4%

In the mid-quarter review of the monetary policy held today, the Reserve Bank of India (RBI) kept key policy rates and the Cash Reserve Ratio (CRR) unchanged. However, the guidance given was that “a durable receding of inflation” will open up space for further easing of the monetary policy.

The repo rate stands at 7.25% while the reverse repo rate stands at 6.25%. The CRR remains at 4% of banks Net Demand and Time Liabilities (NDTL).

The guidance given by the central banks was that the monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead.

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth. While several measures have been taken to contain the current account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows,” the central bank said in the policy statement.

The guidance added that RBI stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.

Government bond yields inched up a tad following the policy statement. At 11:10AM the yield on the 10-year benchmark government bond 7.16% 2023 was trading at 7.33% compared with 7.32% before the release of the policy statement.

The Wholesale Price Index (WPI) inflation data release on Friday showed that for the month of May it fell to 4.7% compared with 4.89% a month ago.

What prompted RBI to maintain status quo?

<sup>Inflationary pressure arising from weakening rupee (Data of rupee/$ since April 1, 2013)

Persistent imbalances in food (Food inflation data of last 1 year)

High current account deficit, risk of sudden reversal of capital flow (CAD as % of GDP and FII inflows for April, May and till June, 2013)</sup>

Future rate cut will depend on…

^{Monsoon could favourbly impact food prices: Rains over 40% above normal rain till June 16, Forecast of 101% of long period average in July, 96% in August}

Fall in gold import can narrow CAD (I will mail gold import data separately)

‘Durable’ receding on inflation (WPI data for last one year)

RBI will announce its next policy review on July 30