Rajan maintains status quo; inflation to determine rate hike

Mumbai, Dec 18: In a surprise relief to borrowers, Reserve Bank today left key policy rates unchanged but said it will hike interest rates if inflation does not subside in line with the expected declining trend.

"If inflation in food and fuel do not fall, RBI will act on off policy date," RBI Governor Raghuram Rajan said soon after unveiling the mid-quarter review of monetary policy.

RBI has kept short-term lending rate unchanged at 7.75 per cent, while the cash reserve ratio (CRR) remained at 4 per cent. The next policy review is due on January 28. Noting that current inflation is too high, he said, "given the weak state of economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."

"There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation," he said, adding, the central bank will remain vigilant.

Since taking over as the RBI chief in September, Rajan had increased the key rate by 0.50 per cent in two instalments.

The status quo decision came as a surprise as only last week the RBI had pulled up banks for not helping it in monetary policy transmission. The decision to keep rates unchanged will be a big 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.

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."

PTI