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RBI's first bi-monthly monetary policy: Goes for status quo with respect to key policy rates
Today the country's central bank announced RBI announced its first bi-monthly monetary policy. The Reserve Bank left the short-term lending rate or repo rate unchanged at 8% and the cash reserve ratio static at 4%. Governor Raghu Ram Rajan-led RBI also halved the overnight call money rate to 0.25% and increased the 7-day and 14-day repo limits to 0.75% from 0.50%.

“At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy,” RBI Governor Rajan said, as quoted by The Hindu.

The Governor also gave a promising statement that if inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, there won’t be any rate hikes.

Industry body FICCI while reacting on the RBI policy said that tweaking policy rates downwards would help lift business sentiments.

Sidharth Birla, President, FICCI said that the industrial growth remained sluggish and the improvement in January IIP numbers was meager and there were no clear signs of growth bottoming out.

“Going ahead, it will be vital to strengthen the sync between government actions and RBI policy. We feel relying primarily on monetary policy for inflation management may not be a comprehensive approach. There are administrative fixes and fiscal measures that need to be adopted. This is all the more important because the inflation problem that confronts us is largely the result of supply side factors. Also, there has been an evident shift towards consumptive expenditure from investment expenditure and we need to amend this on a priority basis", said Birla.

Commenting on the first bimonthly monetary policy statement released today, Chandrajit Banerjee, Director General, CII noted that the RBI, in a quest towards maintaining a fine balance between growth and inflation, had announced a status quo in policy rates which was as per market expectations.

However, at a time when growth impulses remain weak and WPI inflation has been on the declining trajectory for the last nine months, the RBI should have taken this opportunity to announce a cut in policy rates which would stimulate demand and kick start the investment cycle, added CII.

The CII DG also said, “What is more, going forward, the pressure on imported inflation would also diminish due to slowing of Chinese economy and softening of global commodity prices. All this should have encouraged the RBI to effect a cut in policy rates. In such a scenario, an impetus to growth should have been a priority.”

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