A sharper-than-anticipated upsurge in inflation prompted Reserve Bank of India Governor Raghuram Rajan to keep the key policy rates on hold, a stance that was widely expected by bankers, economists and treasury market experts.

Though the RBI said its monetary policy stance remains accommodative, the tone indicated a cautious outlook. The Governor, however, sought to assuage market players’ concerns on dollar and rupee liquidity once FCNR(B) deposits raised by banks during September-November 2013 start maturing from September 2016.

Rajan emphasised that the central bank has plenty of dollars that it can supply, if necessary, to stem possible volatility in the foreign exchange market arising from dollar outflows due to maturing FCNR(B) deposits.

Dollar outflows on that account could be about $20 billion. An increase in the sale of dollars to banks will result in rupee liquidity getting sucked out of the market.

Asked if the policy tone was hawkish, Rajan said: “I hate these bird analogies — hawkish, dovish, etc. I would just say it (the policy) is a realistic assessment of the data that have come in.”

The RBI had cut the repo rate from 6.75 per cent to 6.50 per cent on April 5. Explaining its latest stand, the RBI said the inflation surprise in the April reading (retail inflation jumped to 5.39 per cent in April, against 4.83 per cent a month earlier) makes the future trajectory of inflation somewhat more uncertain.

Inflationary pressures The Governor observed that there are potential disinflationary pressures (arising from a strong monsoon, continued astute food management and expansion in supply capacity, especially in services) as well as potential inflationary pressures (from food items as well as a reversal in commodity prices).

“The net effect is we have put a little more weight on upside risks to inflation but we have to wait and see. The (retail inflation) target of is 5 per cent by March 2017. We have to figure out how to attain it,” he explained.

Asked to explain the ‘stay on hold but remain accommodative stance’, Rajan elaborated: “We haven’t shifted our stance to either a neutral stance or a tightening stance. We are still accommodative. That means we are looking for room to ease. If that room opens up, we will be able to ease. Broadly, we are still in easing mode.”

With the RBI not moving on the repo rate, banks are unlikely to change deposit or lending rates.

On this issue, Rajan said, “What we have seen in April-May is that while credit growth hasn’t been very strong, deposit growth has been fairly strong.

“So, my hope is that as deposits keep building up, banks find more of a need to make those deposits go to work other than through investment in government securities. They start making more loans and look for borrowers and start reducing rates more.”

SBI Chairman Arundhati Bhattacharya said, “The tone of the policy is fairly balanced, pragmatic and continues to reemphasise that the policy continues to be in accommodative cycle. “

Economic Affairs Secretary Shaktikanta Das said, “RBI policy statement broadly endorses government expectations on GDP growth and inflation.”

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