The Reserve Bank of India (RBI) sent a strong signal on Tuesday that it will refrain from cutting interest rates until it is confident that consumer inflation can be reduced to a target of 6 per cent by January 2016.
The RBI policy review statement reinforced Governor Raghuram Rajan's commitment to tame inflation in a country that has long struggled with prices rising at double digit levels annually, causing most distress for the country's poor.
The RBI kept its key policy repo rate unchanged at 8 per cent, as widely expected, and also left its main liquidity levers - the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) - untouched.
Warning of upside risks to its 2016 inflation target, the RBI said policy moves would hinge on inflation trends. "This continues to warrant policy preparedness to contain pressures if the risks materialise," the RBI statement said. "Therefore, the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6 per cent by January 2016), while being contingent on incoming data."
Consumer price inflation slowed to 7.8 per cent in August, making the RBI far more confident that the near-term target of 8 per cent inflation in January would be met. In a separate report on inflation, the RBI spelled out its concerns for the future, noting elevated inflation expectations among households and an enduring risk of higher food prices because structural issues were taking time to solve.
The central bank projected inflation to ease to 6 per cent by November but soon rise to around 8 per cent by January through March 2015 as a favourable base effect is likely to reverse.