RBI likely to hold rates Tuesday as inflation high

With inflation still running high, the Reserve Bank at its fourth bi-monthly policy review Tuesday is unlikely to cut interest rates.

Consumer price index (CPI) -based retail inflation eased to 7.8 percent in August from 8.59 percent in April. Wholesale price index (WPI) inflation has also eased to 3.74 percent in August from 5.55 percent at the start of the current fiscal.

The RBI headed by the monetarist-inclined Governor Raghuram Rajan has set a target for CPI inflation at 8 percent by January 2015 and 6 percent by January 2016.

At an industry chamber Ficci-organised banking conference earlier this month, Rajan had said there was a need to "break the back" of inflation.

"The real problem is inflation that is persistent. We have been emphasising again and again in order to 'break the back' of inflation, we got to break this persistence," Rajan had said at an event.

"I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when feasible. It will be feasible when we would have won the fight against inflation," he had added on the question of RBI rates.

The RBI left key interest rates unchanged in its third bi-monthly monetary policy review early August, saying near-term tightening is not expected if inflation continues to ease.

"Reserve Bank will continue to monitor inflation developments closely, and remains committed to the disinflationary path of taking Consumer Price Index (CPI) inflation to 8 percent by January 2015 and 6 percent by January 2016," Governor Rajan had said in his policy statement.

"While inflation at around 8 percent in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term," Rajan said.

The repo rate, or the interest that banks pay when they borrow money from the RBI to meet their short-term fund requirements, was left unchanged at 8 percent.

The reverse repo rate, or the interest that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, had been adjusted to 7 percent.

The Cash Reserve Ratio (CRR) was left unchanged at 4 percent. The marginal standing facility rate and the Bank Rate were also kept unchanged at 9 percent.

The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, was cut by 0.5 percent to 22.0 percent of their net demand and time liabilities (NDTL) with effect from Aug 9 this year.

Indian Banks Association chief executive M.V. Tanksale said there was no need for an SLR cut because credit pick-up was slow and there was also no urgent need of liquidity.

State Bank of India chairperson Arundhati Bhattacharya said: "RBI is likely to keep interest rate unchanged."