Rajan holds ground, leaves rates unchanged

Mumbai: RBI Governor Raghuram Rajan Tuesday kept interest rate unchanged, saying that a shift in stance is 'premature' but hinted that a cut may come early next year if inflation continues to ease and government acts on the fiscal side.

"A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle," he said.

Accordingly, the repo rate continues to be at 8 per cent while the cash reserve ratio has also been retained at 4 per cent.

On the inflation trajectory, Rajan said he expects it to ease further and average at the 6 per cent.

"Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through," he said in the bi-monthly review of the monetary policy.

Driven largely by a base-effect, the consumer price inflation for October had come in at 5.52 per cent, the fifth consecutive month that it had fallen down.

Under its glide path, the RBI is targeting to get the CPI inflation at 8 per cent as of January 2015 and take it down to 6 per cent by January 2016. While the 2015 target is achievable, Rajan had in the last policy sounded concerned about the "upside risks" to the 2016 target.

Central forecast for retail inflation is revised downward to 6 per cent from 8 per cent for March 2015.

Calls for a rate cut had been growing in the run up to the policy announcement, with Finance Minister Arun Jaitley also pitching for lower the cost of capital to boost growth.

The stock market recovered briefly after the policy announcement but was again trading lower than Monday's close.