Why RBI unchanged the key policy rates?

Reserve bank of India unchanged the key policy rates such as Repo rate at 8.5%, reverse repo rate at 7.5% in mid quarter Monetary Policy review. The Repo rate is the rate at which banks borrow from the RBI and the reverse repo was the vice versa. Further, the central bank has kept the Cash Reserve Ratio (CRR) at 6% and the marginal standing facility (MSF) rate at 9.5%. Interestingly, the RBI has kept increasing the key policy rates continuously from the previous thirteen times.

The markets are expecting such move from the RBI as the global economy outlook has worsened significantly due to the turbulent financial situation in the Europe and sluggish growth in US economy. More importantly, the domestic growth decelerating and the inflation is 9%, way above the RBI comfort zone. Further, the crude oil prices remain elevated and sharp depreciation in Rupee from the August 2011, resulted the high import bill further resulted in higher fiscal deficit. This made the RBI to keep the key policy rate kept unchanged.

Meanwhile, the central bank mentioned in press release that, the inflation remains on its projected trajectory, downside risks to growth have clearly increased. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. Interestingly, monetary policy actions are likely to reverse the cycle, responding to the risks to growth. However, it emphasized that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead.