5 reasons why RBI chose to keep rates unchanged

The Reserve Bank of India Wednesday pleasantly surprised the money and stock markets by keeping benchmark rates unchanged, but warned it should not be perceived as being soft on inflation.

The consensus view was that the central bank would raise the repo rate by 25 basis points.

Here are five reasons why RBI chose to maintain a status quo on rates:

*Headline inflation, both retail and wholesale, have increased, mainly on account of food prices. There are indications that vegetable prices may be turning down sharply.

*Given that short term trends in inflation are unpredictable, the economy is weak, an overly reactive (to inflation) policy could be counter productive.

* In addition, the disinflationary (slowing inflation rate) impact of recent exchange rate stability should play out into prices.

*The negative output gap (gap between what the economy is producing and what it can produce), including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation.

*If food prices don't fall and inflation remains high, the RBI will raise  benchmark rates even before the next policy review.