7 reasons that may have prompted the RBI to keep rates steady

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Updated: Tuesday, July 31, 2012, 11:17 [IST]
 
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 7 reasons that may have prompted the RBI to keep rates stea

The RBI Monetary Policy Review has been a non-event with the central bank holding key rates steady. Here are a few reasons why the RBI may have held the repo rate steady and not decreased it.

Inflation has been above the RBI 's comfort levels
WPI inflation for June was 7.25%, which is way above the RBI's comfort levels of around 5%.

Government inaction on the fiscal front
The government has been doing nothing to address the huge fiscal deficit. It has not shown any policy action to increase fuel prices and tame deficit. The RBI may want the government to act, before it can reduce rates further.
The central bank has made it clear that monetary policy space needs to be created through fiscal adjustment and structural measures to improve supply conditions and boost the investment climate

Deficient monsoons may lead to further escalation in prices
The deficient monsoons are likely to see further escalation in prices, particularly food prices. This would lead to a further spike in inflation.

Global commodity prices are on the rise
Global commodity prices are on the rise. Brent crude has moved from levels of $90 to around $106 per barrel and since India imports 70% of its fuel requirements, any upward pressure on crude has an effect on fuel prices, subsidies and fiscal deficit.

Depreciation of the rupee
The rupee has been depreciating steadily, making imports, particularly of commodities more expensive.
This could fuel a price rise in the short to medium term.

CPI figure still in double digits
The retail consumer price index (CPI) inflation was around 10.02% for June. This is certainly high and is not in the central bank's comfort zone.

Easy liquidity conditions
The RBI also noted that liquidity condition in the system is at par with its estimations.

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Story first published:  Tuesday, July 31, 2012, 11:16 [IST]
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