RBI combats inflation; hold rates steady

Reserve Bank of India (RBI) held rates steady on Thursday, as it sought to support faltering growth and avoid stoking already high inflation levels.

All six members of the Monetary Policy Committee (MPC) voted to keep the rates steady.

The MPC has revised its near-term inflation projection upwards.

Annual retail inflation increased to 7.35 per cent in December, mainly due to a rise in food prices.

That comes against slowing growth in the economy.

RBI cut its policy rate by 135 basis points over five straight meetings last year until December. In December, it held rates steady due to the growing concerns over inflation.

On Thursday, the central bank said it expects inflation in the ongoing fourth quarter of fiscal 2020 to hit 6.5 per cent. In December, it had forecast that inflation would be in the range of 5.1-4.7 per cent during the second half of the current fiscal year.

It also forecast inflation in the range of 5.4-5 per cent in the first half of the upcoming fiscal year, as compared to its own prior projection of 4-3.8 per cent for that period.

The interest rates and inflation have an inverse relationship. Decreasing interest rates in an inflationary environment would accelerate the inflation. Hence, RBI took the recent stance.