By Ruma Dubey

Whew! The much expected, at least by analysts and economists happened – the RBI Governor, Raghuram Rajan did not change the rates; repo, reverse repo and CRR were left unchanged.

But the good news here is that RBI has stated in the policy that if the current inflation momentum continues and fiscal developments remain encouraging, a change in the monetary policy stance is likely early next year (calendar year), including outside the policy review cycle. Well, this is logical – Rajan has done the perfect thing. Things on the economic front are looking good but how much of this is sustainable? It is thus very logical to wait and watch, to ensure that inflation remains low. And it is very good to know that Rajan did not give in to any pressure – neither from the Government nor the market expectations.

Highlights of the fifth bi-monthly credit policy

• Keeps the repo rate under the liquidity adjustment facility (LAF) unchanged at 8%
• Cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL)
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• To continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through auctions
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• To continue with daily one-day term repos and reverse repos to smooth liquidity.
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• Reverse repo rate under the LAF will remain unchanged at 7% and the marginal standing facility (MSF) rate and the Bank Rate at 9%.
• Fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment.
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• Administered price corrections, as and when they are effected, weaker-than-anticipated agricultural production, and a possible rise in energy prices on the back of geo-political risks could alter the currently benign inflation outlook significantly.
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• The inflation reading for November – which will become available by mid-December – is expected to show a further softening. Thereafter, however, the favourable base effect that is driving down headline inflation will likely dissipate and inflation for December (data release in mid-January) may well rise above current levels.
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• The key uncertainty is the durability of this upturn. The full outcome of the north-east monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses, but it is reasonable to expect some firming up of these prices in view of the monsoon’s performance so far and the shortfall estimated for kharif production. Accordingly, the central forecast for CPI inflation is revised down to 6%for March 2015.
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• Risk to the January 2016 target of 6% appear evenly balanced under the current policy stance.
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• A durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. The success of ongoing government actions in these areas will be key to reviving growth and offsetting downside risks emanating from agriculture – in view of weaker-than-expected rabi sowing – and exports – given the sluggishness in external demand.
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• Projected growth for 2014-15 has been retained at 5.5%, with a gradual pick-up in momentum through 2015-16 on the assumption of a normal monsoon and no adverse supply/financial shocks.
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• The sixth bi-monthly monetary policy statement is scheduled on Tuesday, February 3, 2015.

This is a very pragmatic policy. Under the current circumstances, this is the most sensible stance. The RBI Governor said that after having high inflation for some four years, if the rates are coming down now, he wants to be sure that it is for real and then take an action, instead of flip-flop in the decisions later.

And putting to rest doubts that RBI is concerned only about inflation and not about growth, Rajan said that it is being very short sighted to say that RBI does not care about growth, it is not against growth and it is creating the framework for this sustainable, long term growth and not quarter-to-quarter growth.

The market, which had honed its sight on today’s policy will now have to look for another moving target. The good news here is that the market recognized why the Governor kept rates unchanged and did not exactly crash in disappointment.