The central bank on Tuesday kept the repo rate, or the rate at which it lends money to commercial banks, unchanged at 7.25%, and the cash reserve ratio, or the amount of funds that the banks have to keep with the Reserve Bank of India (RBI), at 4%.
“It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy“, RBI Governor Raghuram Rajan said in a statement following the bank’s monetary policy review meeting in Mumbai. “That is what we are looking for to see how much room we have (to cut rate)”, Mr Rajan told CNBC Awaaz.
Disappointed with the RBI’s move to hold policy rates, India Inc today said the central bank should have slashed the benchmark rate to address risks to economic growth accruing from weak demand conditions which are holding back investments, as cost of capital remains high.
It is worth noting that, despite the risks, the RBI actually revised down its inflation projections for Q1 2015 by 0.2%-points today compared to the June statement, citing “prospects of softer crude prices and a near-normal monsoon thus far” …
The release of the Inflation Report, rates decision and minutes – all previously published on separate dates – has been dubbed “super Thursday” by Bank watchers because of the slew of information being made available simultaneously. The Bank of England has also said its next move will most likely be a rate hike, probably in early 2016.
Rajan said that RBI’s expectation for retail inflation is around 6.1 per cent in January-March, 2016, but it should be actually below that.
Whereas the decision to leave rates unchanged this time was widely expected, economists polled by Reuters before the review were evenly split over chances for reduction by the end of the year. RBI Governor Raghuram Rajan will have to find a balanced approach in his steady fight against inflation and the growing chorus of calls from India’s business community. The last cut lowered the repo rate to 7.25 per cent on June 2.
The persistence of very low rates of inflation is a worry for central bankers, since it threatens to permanently alter consumer expectations and makes it more hard to attain 2 per cent targets in the future.
“We are in discussion with RBI Governor, with RBI, in the form and manner of the MPC and in fact, we now have a position which is actually agreed upon, but which I am not going to discuss. It will ultimately be disclosed in Parliament”, Mehrishi had said. Overall, there is stability in the economy with a gradual improvement in growth, ” Kochhar added.
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.
It was the third repo cut this year in June, while the central bank had indicated that there may not be any further cuts in the near term.