Rajan rebuffs govt pressure, interest rates unchanged

Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.

The Reserve Bank of India (RBI) has already reduced the policy rate by a total of 75 basis points, or 0.75 <g data-gr-id="39">per cent</g>, since January, when it embarked on an easing cycle.

The banks, however, have passed on only 0.3 <g data-gr-id="43">per cent</g> to borrowers, Rajan said. “Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” he added.

The central bank, he said, will look for more room to ease policy rate depending upon fuller transmission of rate cuts by banks, food prices and US Federal Reserve normalisation signs. A top finance ministry official had on Monday pitched for the fourth interest rate cut this year, saying inflation can not be the sole driving factor in deciding on monetary policy action.

Keeping rates unchanged was driven by RBI not wanting to risk inflation from surging, a poor monsoon and a possible increase in interest rates in the US next month.

RBI said sustained hardening of inflation, excluding food and fuel, is “most worrisome”. “Significant uncertainty will be resolved in the coming months, including likely persistence of recent inflationary pressures, full monsoon out-turn, as well as possible Federal Reserve actions,” he added.

Inflation projections for January to March 2016 are lower by about 0.2 <g data-gr-id="36">per cent</g>, he said.

Retaining economy growth forecast at 7.6 <g data-gr-id="38">per cent</g> for 2015-16, RBI said <g data-gr-id="42">outlook</g> was improving gradually.

Rajan also said that RBI will announce at least one set of bank licences before <g data-gr-id="40">end</g> of August.

Consumer price inflation accelerated to 5.4 <g data-gr-id="49">per cent</g> in June from 5.01 <g data-gr-id="50">per cent</g> in the preceding month on rising food prices. The acceleration in inflation came despite a favourable base effect. 

Under a target declared as part of a newly announced inflation-targeting framework, RBI is targeting to hold the inflation under 6 per cent by January next year, which many analysts feel is possible.

However, after this, the central bank’s aim is to compress it down further to 4 per cent in two years.

Recently, there have been some supporting factors like better-than-expected rainfall, wider acreage of sown crop and softness in global commodity prices following the Iran nuclear deal which may take off the pressure on inflation. Those making a case for rate cuts were hoping that these factors, along with the sluggish economic growth, will prevail upon the central bank to ease the rates further. The factory output growth slowed down to 2.7 <g data-gr-id="51">per cent</g> in May from 3.4 <g data-gr-id="52">per cent</g> in the previous month. 

As expected, India Inc expressed disappointment on RBI’s decision to maintain status quo saying that a rate cut at this juncture would have helped the industry is dealing with stressed assets.