Monsoon, Fed impact next trigger for rate cuts: Moody’s

“From the RBI’s side, we wanted to ensure the structure should ensure continuity in policy as the market attempts to understand the voting patterns of new MPC members”, he said.

Whereas, the largest private sector bank said that RBI has opted to monitor inflation trends for some more time.

Apparently, Rajan has ignored pressure to loosen policy, citing a spike in food prices and banks not lowering their rates even after three cuts totaling 75 bps by him.

But, to the central bank’s chagrin, the benefits for the broader economy have been limited because of commercial banks’ reluctance to lower their lending rates.

Based on the risks to the inflation outlook, and given the RBI front-loaded policy easing when they last met in June, the board noted that it was “prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy”. Consumer price inflation accelerated 5.4% in June from a year earlier and is forecast to increase toward the central bank’s 6% target by January.

As a result of the policy update on Tuesday, the repurchase rate, or the short-term lending rate of the central bank, remains unchanged at 7.25 percent and so does the cash reserve ratio (CRR), or the liquid money banks have to compulsorily hold, at 4.00 percent. While there is a little room for a 25-bp rate-cut, that is likely to come in 4Q FY16.

“RBI will also wait to see if the Fed raises rates in September as that will potentially impact the volatility in the foreign exchange market”, Bajoria said.

Anxious about inflation, but lowers projections: The policy statement shows that the RBI expects inflation to be worrying in the next few months, due to inflation in vegetable-pulses-milk rising.

Eleven analysts polled by The Wall Street Journal before the rate decision had unanimously predicted Mr. Rajan would keep the repurchase-agreement rate unchanged at 7.25%.

While the RBI highlighted the risk of volatility in case of a US rate hike, overall, it seems confident that inflation and growth recovery look more or less on projected lines. A change in repo rate could have brought down the base rate of banks had it induced reduction in deposit rates, but that is not happening. Under the current system, the RBI Governor does have the power to veto the advice received from the committee, but, he said, it was not right to empower a single individual thus. Control of a monetary policy committee is one of the final pieces of Rajan’s plan to modernise the 80-year-old central bank and put it on par with countries such as the US and the UK.

“Though 7.5 per cent GDP growth appears high, it is below India’s potential” of around 10 per cent, Faraz Syed, an economist at Moody’s Analytics in Sydney, wrote in a July 29 report.

Exhorting equity and debt markets to “take the policy announcements positively”, chief investment officer of Future Generali Life Insurance, Nirakar Pradhan, said: “Banks have already started transmitting a rate cut”.