RBI maintains status quo on policy rates

Scales down GDP growth projection

The Reserve Bank of India (RBI) at the first quarter review of monetary policy has retained the policy rates steady, while scaled down the GDP growth projection for FY2014. The repo rate, at which RBI lends to bank under LAF window has been retained steady at 7.25%. The Cash Reserves Ratio (CRR) also has been retained unchanged at 4.0%.

RBI has scaled down the GDP growth projection for FY2014 to 5.5% from earlier projection of 5.7% at May 2013 monetary policy. However, the RBI has retained the inflation projection for March 2014 unchanged at 5.0%.

RBI has maintained the non-food credit growth projection steady at 15%. Deposit growth projection also remains steady at 14% for FY2014.

As per the RBI, the current situation - moderating inflation and decelerating growth - would have provided a reasonable case for continuing on the easing stance. However, India is currently caught in a classic 'impossible trinity' trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns.

RBI commented that the recent liquidity tightening measures are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation.

RBI emphasized that the time available now should be used with alacrity to institute structural measures to bring the CAD down to sustainable levels.

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