The Reserve Bank of India (RBI) kept all rates unchanged in line with consensus and our expectation. The repo rate stands at 4.75% and the reverse repo rate at 3.25%, while the CRR of banks is at 5%.
The RBI raised its inflation target from 4% to 5% for end-March 2010 in line with market expectations.
In the policy statement, the RBI listed its future challenges as four-fold. First, manage the balance between the short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressures on the way forward. Second, to manage the government’s borrowing program.
In our view, the rate decision and policy statement signals a move away from a sole focus on boosting demand to giving more weight to inflation. Inflationary pressures have been acknowledged explicitly and the WPI target revised upwards.
The policy confirms that there will be no more rate cuts and therefore takes away a small overhang on the INR. The Dollar was trading at 48.21 against INR.