In line with expectations, the Reserve Bank of India (RBI) has retained the key policy rates citing high food inflation, rupee depreciation and uncertainty over foreign fund inflows.

RBI retained its key operative rate, repo rate at 7.25%. While CRR was kept unchanged at 4% and liquidity is expected to be managed through the route of OMOs.

OMOs are the market operations conducted by RBI by way of sale/purchase of government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.

RBI has clearly indicated that each policy stance will be viewed in light of emerging inflationary risks and current account deficit (CAD) position; growth (in line with earlier policies) has taken a back seat. Sharp rupee depreciation due to reversal of FII debt inflows on expectations of trimming of Fed stimulus policy has raised huge concerns on financing of CAD.

Combined efforts from RBI as well as government to lower the gold imports is likely to keep trade deficit in check as compared to the last fiscal. Inflation risk arising from imported inflation, significant hike in MSP prices and distribution of rainfall is expected to further determine RBI’s course of action.

Sharp slowing down of core inflation and slowdown in growth is likely to keep pressure on RBI to lower the interest rates further. Analysts expect another 50-75bps cut in repo rate by end of Mar 2014.