In a widely expected move, the Reserve Bank of India (RBI) left its key lending rate — repo rate — unchanged at 8%, warding off fears of an immediate hike in consumer and home loan equated monthly installments (EMIs) as the central bank hinted that it would not raise lending costs if inflation continued to remain benign.
“The Reserve Bank’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path,” Rajan said in his policy statement.
“If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture.”
The RBI’s move to maintain a status quo on interest rates was aided by falling inflation rates.
Wholesale inflation rate eased to a nine-month low of 4.68% in February from 5.05% in the previous month on plunging vegetable prices, giving the UPA government a reason to cheer ahead of the elections next month.
Retail inflation — a more realistic index as it captures shop-end prices — eased to a two-year low of 8.10% in January from 8.79% in the previous month.
Rajan, however, cautioned that two events — the results of Lok Sabha elections and summer rains — could likely influence outlook on inflation and markets.
The RBI has forecast India’s GDP to grow by 5.5% in 2014-15, from the projected 4.9% in 2013-14, although “lead indicators do not point to any sustained revival in industry and services yet, and the outlook for the farm sector is contingent upon the timely arrival and spread of the monsoon”.
A fractured mandate in the Lok Sabha polls can also make the markets more volatile.
“The issue is that the markets right now are anticipating a stable government and rapid policy actions. To the extent markets are disappointed, it will reflect on markets. We have to be prepared for some turmoil,” he said.