Reserve Bank of India Governor Raghuram Rajan has left interest rates unchanged along expected lines in his final monetary policy review, as his three-year term comes to an end. The repo rate, at which the RBI lends to commercial banks, remains at 6.5 percent. In their previous policy review in June, the RBI had maintained the same rate. Once again, the RBI Governor has chosen pragmatism over misguided optimism. Rajan’s decision to maintain the status quo reflects the current reality of a steady rise in retail inflation. Consumer prices rose 5.77 percent on an annual basis in June - the fastest pace since August 2014.
Rising crude oil prices and the subsequent upward pressure from food inflation--recorded at 7.79 percent in June 2016--are some of the reasons behind the recent spike in inflation. As we have argued in these columns, nothing pinches the common man’s pocket more than rising inflation. The repo rate is one of the instruments used by the Central bank to control inflation. Meanwhile, the reverse repo rate – which commercial banks use to charge the Central bank – also remained the same at 6 percent, Rajan said at the bi-monthly review. It also maintained the Gross Domestic Product outlook at 7.6 percent. The cash reserve ratio also stays at 4 percent.