As widely expected, the Reserve Bank of India (RBI), on Tuesday, kept the indicative policy rate (repo) unchanged at 8 per cent while taking measures to provide longer term liquidity in the system.

Repo rate is the rate at which banks borrow funds from the central bank.

“On the basis of an assessment of the current and evolving macro-economic situation, we have decided today [Tuesday] to keep the policy repo rate unchanged at 8 per cent,” said Raghuram Rajan, while addressing a press conference here to announce the first bi-monthly monetary policy for 2014-15.

“We have also decided to increase the liquidity provided under 7-day and 14-day term repos, from 0.5 per cent of the banking system to 0.75 per cent, and decrease the liquidity provided under overnight repos from 0.5 per cent to 0.25 per cent with immediate effect,” he added.

“Our policy stance is firmly focussed on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI (Consumer Price Index) inflation by January 2015 and 6 per cent by January 2016,” said Dr. Rajan

At the current juncture, he said “it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013 through January 2014 to work their way through the economy.” Furthermore, “if inflation continues along the intended glide path, further policy tightening in the near-term is not anticipated at this juncture.”

In pursuance of the Urjit R. Patel Committee’s recommendation to de-emphasise overnight “guaranteed-access” windows for liquidity management and progressively conduct liquidity management through term repos, “we have decided to further reduce access to overnight repos ……… while compensating fully with a commensurate expansion of the market’s access to term repos from the Reserve Bank. The primary objective is to improve the transmission of policy impulses across the interest rate spectrum,” Dr. Rajan added.

The RBI Governor said that real GDP (gross domestic product) growth was projected to pick up from a little below 5 per cent in 2013-14 to a range of 5-6 per cent in 2014-15, albeit with downside risks to the central estimate of 5.5 per cent.

“Easing of domestic supply bottlenecks and progress on the implementation of stalled projects already cleared should contribute to growth, as will stronger anticipated export growth as the world economy picks up,” he said. He said that for the year as a whole, Current Account Deficit (CAD) was expected to be about 2 per cent of GDP.

“Sustained inflows, augmented by repayments by public sector oil marketing companies of their foreign currency obligations to the Reserve Bank during March, have led to an increase in reserves,” said Dr. Rajan.

However, he said that “there are also risks to our central forecast of 8 per cent CPI inflation by January 2015.” These include a less-than-normal monsoon due to possible El Nino effects; uncertainty on the setting of minimum support prices for agricultural commodities; and the setting of other administered prices, especially of fuel, fertilizer and electricity; the outlook for fiscal policy; geo-political developments; and their impact on international commodity prices. There would also be a downward statistical pull on CPI inflation later this year, due to base effects from high inflation during June-November 2013, he said.

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