India Monetary Policy


Central Bank leaves rates unchanged

On 16 December, the Reserve Bank of India (RBI) announced its decision to leave interest rates unchanged. The decision marked a pause in the tightening cycle, during which there had been six consecutive rate hikes. The decision was in line with market expectations and confirmed previous statements made by the RBI Governor, Duvvuri Subbarao who, following the 2 November meeting, declared that the probability of further additions to borrowing costs in the ?immediate future? would be ?relatively low?. The RBI acknowledged the strong momentum shown by the domestic economy, buttressed by a recovery in the agricultural sector due to a positive monsoon season and more buoyant industrial activity. According to the RBI, inflation has moderated in recent months. However, upside risks persist due to demand-pull pressures and ?higher global commodity prices?. The main concern expressed in this month's monetary policy decision was the importance of providing liquidity to the economy, which has suffered from liquidity shortages in line with the tight monetary policy stance adopted by RBI in recent months. Accordingly, the RBI justified the decision of leaving interest rates unchanged, stating that the move would ?alleviate the liquidity pressure in a manner consistent with the monetary policy stance?. The next monetary policy meeting is scheduled for 25 January. As inflationary pressures remain strong, most market analysts expect the Reserve Bank to resume the tightening cycle at the next meeting. Consensus Forecast panellists anticipate that the tightening cycle will resume before the end of the current fiscal year, which ends in March 2011. On average, the panel expects the RBI to raise interest rates to 6.45% by the end of this fiscal year. By the end of the fiscal year 2011/12, the panel projects rates to increase further to an average of 7.08%.

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