RBI keeps interest rates unchanged Reuters Story Dated: Wednesday, December 18, 2013 15:58 hrs IST

The Reserve Bank of India (RBI) unexpectedly kept the policy interest rate on hold on Wednesday, despite calling current inflation too high, citing the prospect of easing retail prices and its concerns about the weak domestic economy. The RBI had been widely expected to lift its repo rate by 25 basis points, but instead opted to keep the main lending rate at 7.75 per cent. "The policy decision is a close one. Current inflation is too high," said the RBI in its policy statement. However, the RBI also cited its reluctance to over-react given the "wide bands of uncertainty" surrounding the outlook for inflation amid signs of sharply falling vegetable prices and "the weak state of the economy." Still, the RBI said it would remain vigilant on inflation and that it would be ready to act even in between policy reviews should headline or core inflation not ease as expected, albeit in a "calibrated" manner. The RBI added it would gauge the impact of any decision by the US Federal Reserve to withdraw its monetary stimulus. The US central bank concludes its policy meeting later in the day. "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. The Reserve Bank will be vigilant," it said. The RBI had raised interest rates by a quarter percentage point at its previous reviews in September and October. No review was held in November.

EXPERT VIEWS SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI The pause was surprising given the sharp rise in both retail and wholesale inflation. Clearly, the RBI expects a sharp fall in inflation during December-February. It is also probably getting unnerved by weak growth and will also wait for the Fed action later tonight. However, we do not see inflation fall significantly going ahead.

PHANI SEKHAR, FUND MANAGER, ANGEL BROKING, MUMBAI It is a calibrated policy based on the assumption that inflation in November was a one off. It also has a caveat that the RBI can act outside the policy too. A lot now depends on the next data

reading or other evidence on inflation. Equities would react positively for the next few days. Markets are forward looking and would even try to extrapolate this into an end of rate hike cycle for the short term.

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI It is completely unexpected given the liquidity in the system as well as the inflation trajectory. I think it is just postponement of action, because the policy clearly says they (the RBI) may take action any time, even in the interim between two policies, if the situation warrants. They are saying this because they are waiting for food inflation to ease, because these spikes, according to them, were caused by temporary imbalances. We should be prepared for acute tightness going forward, given the kind of abnormal inflationary pressures the country is facing and I expect these pressures to continue. I feel there will not be any alternative but to reassert monetary tightening, which the next data point would guide.

DARIUSZ KOWALCZYK, SENIOR ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG The RBI governor Rajan is losing credibility after his tough language expressing strong disappointment with high inflation last week. We expect the Indian rupee to fall, but equities and bonds to rise.