RBI keeps key rate unchanged

NEW DELHI: The Reserve Bank Governor Dr Yaga Venugopal Reddy has held his ground and has kept all the key interest rates unchanged.

The cash reserve ratio stays and the CRR repo and reverse repo rates as well as the bank rates remain unchanged. The policy actually leaves flexibility to change repo and reverse rates in the near future.

The Reverse repo rate stays at 6 per cent and CRR at 7.5 per cent. The inflation target for 07-08 also remains at 4 to 4.5 per cent levels and 3 per cent in medium term.

Moving away from the hawkish stance of the previous policy, RBI's second quarter credit policy review unveiled on Tuesday, is driven by liquidity management and move to maintain price stability.

GDP forecast for FY-08 has been set at 8.5 per cent.

The rationale behind RBI's stance this time is that too much liquidity in the market can ignite inflation, especially around the expecations of a rise in food and fuel prices globally, in the near future. Inflation is expected to go up even if fuel rates remain unchanged.

Interestingly, while the financial markets warrant careful monitoring on large forex flows, market sources have not ruled out likely forex flows reversal on global sentiment.

Reddy has rapped the banks on the knuckles for not lowering rates despite easy liquidity conditions and the fact that credit has moderated.

Even though the industry feels that post the announcement of the policy, banks may re-price lending and deposit rates, the softening of the interest rates may not happen before next quarter.

No softening of bank interest rates before next quarter: Chanda Kochhar, Joint Managing Director, ICICI Bank

"Usually most banks see hardening of rates in the last quarter (Jan-Mach) of the year, but the fact that it has not happened this year means that banks have taken into account the liquidity positions. RBI's response is a measured one given the uncertainities in the global. It has to take note of inflation but at the same time it also has to keep liquidity in mind. Most banks will watch their liquidity positions in the February-March timeframe and go in for interest rate re-structuring only in the next quarter.