Rajan swansong: RBI Governor leaves rates unchanged

Expecting “upside” risk to his March inflation target of 5 per cent due to pay hike of central government employees following the 7th Pay Commission and sticky core inflation, which excludes food and fuel, he kept benchmark repurchase rate at 5-year low of 6.50 per cent.

Rajan, who is to demit office after his 3-year term ends on September 4, said: “It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. “As you will note from the policy statement, we have kept rates on hold, maintaining an accommodative stance while we await developments. We are within the inflation band given to us by the Government and expect to be around 5 per cent CPI inflation by March 2017, absent unforeseen eventualities.” 

He was addressing the customary press conference after announcing the third bi-monthly monetary policy for 2016-17. Accordingly, the overnight repo rate at which RBI lends to the system has been retained at 6.5 per cent, while the reverse repo rate which is paid to banks has been maintained at 6 per cent. The Cash Reserve Ratio will be at 4 per cent.

Rajan said risks to the March 2017 target of 5 per cent for headline inflation, which climbed to a 22-month high of 5.8 per cent in June, “continue to be on upside” on factors like food inflation, services and the effect of the seventh pay panel implementation to government employees.

The strong sowing and the positive progress of the monsoon augurs well for the food inflation, RBI said, adding that prices of pulses and cereals are rising.

RBI maintained its growth projection of 7.6 per cent for the current fiscal on a gross value addition basis, saying that favourable monsoon, which is 3 per cent above the average, raises prospects of agricultural expansion as well as rural demand. Besides, higher consumption is expected because of the implementation of the 7th Pay Commission for central government employees.

Rajan, who will return to academia after his current three-year at RBI tenure ends on September 4, had started-off his stint here with a couple of rate hikes, which earned him blame from certain quarters as an inflation hawk.

Signing of the inflation targeting framework between the RBI and the government, based on the recommendations of a committee headed by his Deputy Governor Urjit Patel, only cemented the reputation.

With the Monetary Policy Committee framework on the anvil, wherein shaping of the policy will shift to the panel, today’s might also be the last of the Governor-led policy announcements at Mint Street.

RBI on Tuesday welcomed the passage of the Constitutional amendments for transition to the Goods and Services Tax saying it “augurs well for the growing political consensus for economic reforms.”