In an unexpected move, the Reserve Bank of India (RBI) on Wednesday kept the repo rate — its key lending rate — unchanged at 7.75%, temporarily warding off fears of an immediate hike in consumer loans and home loan EMIs.
The status-quo on interest rates came in despite high inflation in November as the RBI placed its bets firmly in favour of plunging vegetable prices to pull down the overall inflation rate in December.The central bank, however, made it clear that any action on interest rate movements will clearly be determined by December price data that will be released by the middle of January.
If food prices do not fall significantly as expected, the RBI would not hesitate to hike interest rates, governor Raghuram Rajan indicated during the post-policy press conference.
"If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act," Rajan said.
India's wholesale inflation rate during November stood at a 14-month high of 7.52%, while retail inflation was at a nine-month at 11.24%, both driven primarily by very high overall food and vegetable prices.
Inflation, at least vegetable inflation, is showing signs of bottoming out.
Stubbornly high prices of onions, which have been emblematic of India's inflation woes, along with most vegetables, had tripled in the last one year.
Over the last three weeks, however, there has been a sharp fall in onion prices — from about Rs. 80 a kg to about Rs 40. currently — hammered down by arrival of fresh supplies.
C Rangarajan, chairman of Prime Minister's Economic Advisory Council, said the rise in food prices was due to an "extraordinary" increase in vegetable prices and onion prices have fallen by half since their peak.
"We can expect by December for food prices to come down, and that will moderate the CPI (consumer price index) inflation," Rangarajan said.
According to the RBI, retail inflation measured by the consumer price index (CPI) "has risen unrelentingly through the year so far, pushed up by the unseasonal upturn in vegetable prices, double-digit housing inflation and elevated levels of inflation in the non-food and non-fuel categories."
"Current inflation is too high," Rajan said.
Rajan is also keeping one eye firmly on the developments at the two-day Fed Reserve meeting that began on Tuesday amid anticipation that the US central bank will announce a calendar to wind down its easy money policy aided by budding recovery signs in the world's largest economy.
The rupee, which is hovering around 62 to a dollar, could fall further if the US begin "tapering" its monetary stimulus that would prompt foreign funds to move dollars away from emerging markets such as India.
"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," Rajan said.
Read:10 reasons why RBI Governor is worried over rising inflation