Sensex extends losses as RBI holds policy rate

Urjit Patel

India's Central Bank, Wary on Inflation, Set to Keep Rates on Hold

The Monetary Policy Committee (MPC) on its fifth bi-monthly meeting chose to keep the repo rate at the current 6 percent, keeping inflation in mind.

The Reserve Bank of India has kept the repo rate unchanged at the fifth Bi-monthly Monetary Policy meeting today, given the caution over rising inflation. The apex bank is expected to keep key rates unchanged as the GDP growth improved and inflation also recorded a seven-month high.

While there has been weakness in some components of the services sector such as real estate, its survey indicates that the services and infrastructure sectors are expecting an improvement in demand, financial conditions and the overall business situation in fourth quarter, RBI pointed out.

Consequently, the reverse repo rate remained at 5.75 per cent.

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The six-member Monetary Policy Committee noted that the evolving trajectory needs to be carefully monitored and any increase in food and fuel prices may further harden inflationary expectations.

"The MPC remains committed to keeping headline inflation close to 4 percent on a durable basis", the statement said.

We are likely to see a turn in the rate cycle and things will start moving up because cost of funds will move up and the RBI has sent an explicit signal that is primarily concerned about inflation and narrowing output gap.

India's benchmark 10-year bond yield fell 2 basis points to 7.05 percent from around 7.07 percent before the policy decision.

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Data released in November showed that India's annual rate of inflation based on wholesale prices (wholesale price index) rose to 3.59 per cent in October due to an exponential rise in food prices.

The Indian economic growth recovered to 6.3 percent year-on-year in the third quarter from the previous quarter's 5.7 percent growth, slightly coming below the market projection of 6.4 percent.

RBI said that the inflation rate is likely to get higher in near future.

It had reduced the repurchase rate by 0.25 percentage points to 6 per cent earlier in August.

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