Rajan surprises with status quo policy; to watch inflation

Belying market apprehensions, Reserve Bank Governor Raghuram Rajan today sprang a surprise leaving key rates unchanged to back growth but warned that they may be hiked if inflation does not subside.
Rajan's reading of declining inflation led to maintaining the status quo on the repo rate at 7.75 per cent and cash reserve ratio (CRR) at 4 per cent, a move that cheered both the capital market and India Inc.
"If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation...Or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates," he said after unveiling the Mid-Quarter Monetary Policy Review. The next review is due on January 28.

Rajan, who had earlier surprised the markets by raising rates, said vegetable prices which were primarily responsible for inflation soaring to a 14-month high of 7.52 per cent in November, are "turning down sharply" and expected economic growth to be better in the second half of the fiscal.
The decision to keep rates unchanged will be a breather for the industry and retail borrowers in particular as the markets had expected another 0.25 per cent hike in the short-term lending rate that could have raised EMIs for home, auto and other loans.
SBI Chairperson Arundhati Bhattacharya said the bank would not contemplate cutting deposit rates as "it really hurts the depositors and we would not like to do that. Our rates are still higher than what it was on July 15, I see no immediate rate cut."

Commenting on the policy, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said: "It is a difficult balancing act...I certainly think that the priority to RBI is price stability and therefore they should keep continuous watch on what is happening to inflation."
Rajan said economic growth is set to improve in the second half of this financial year on expansion in the agriculture sector, exports and movement in stalled projects.
Factory output shrank 1.8 per cent in October, the first contraction in the Index of Industrial Production (IIP) in four months.