RBI maintains status quo on policy rates

Hints at off-policy rate hike, if inflation excluding food and fuel does not fall

Highlights of Mid-Quarter Monetary Policy Review

* Repo rate unchanged at 7.75%; and

* CRR unchanged at 4.0%

* Global growth continues to remain moderate

* Volatility in financial markets has receded

* It could pick up again following the inevitable taper of quantitative easing in the US, given the large dependence of EMEs on external financing.

* Still lacklustre lead indicators of services and subdued domestic consumption demand suggest continuing headwinds to growth.

* Tightening government spending in Q4 to meet budget projections will add to these headwinds.

* High inflation posing a threat to growth and financial stability.

* High and persistent inflation also increases the risks of exchange rate instability.

* With the normalization of exceptional monetary measures, liquidity conditions have improved, as reflected in the steady decline in the access to the MSF.

* Liquidity is being managed with a view to ensuring that there is adequate credit flow to the productive sectors of the economy.

* Easing CAD and rebuilding forex reserves should help to build resilience to external shocks.

POLICY STANCE AND RATIONALE

* There is reason to wait before determining the course of monetary policy.

* Various factors such as easing vegetable prices, recent exchange rate stability as well as the lagged effects of effective monetary tightening since July, should help contain inflation.

* Current inflation is too high. However, given the weak state of the economy as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty.

* If inflation excluding food and fuel does not fall, RBI will act, including on off-policy dates if warranted.

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