RBI keeps Repo rate unchanged at 7.25 per cent

The tone of the monetary policy stance continues to remain cautious as against expectations of dovish stance.

Some bankers are of the view that there is scope for further rate cut by RBI, but whether it accommodates that in this policy is in the realm of speculation.

However, India Inc is pitching for a rate cut because of low wholesale inflation and slowdown in industrial growth.

While the CPI-urban for June inched higher to 4.55 per cent, the CPI-rural jumped to 6.07 per cent from 5.52 per cent in May. But prices on the whole have been going up as well. Carney said on July 16 it was too soon to be sure that the hourly output of workers had increased enough to slow the impact that rising wages will have on inflation.

Non food and fuel inflation will continue to go up as the new (and higher) service tax rate of 14% comes into effect June 2015 onwards.

Professor Gomes though is convinced there will be no cold turkey tactics adopted by rate-setters, who have kept a firm sense of graduality at the heart of their strategy. When India is on a well-planned growth plan, what is the urgency and necessity to appoint four members from the government and three from the country’s central bank (Reserve Bank of India – RBI) with no veto power for the governor in the monetary policy committee?

According to the RBI, significant uncertainty will be resolved in the coming months including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions. As a result, the interest rate differential between TT – US 10- year Treasuries narrowed substantially to 69 basis points at the end of July 2015 from 82 basis points at the end of May 2015.

“Generally, at the early stages of the turnaround in monetary policy there is a need to do that (mid-policy cuts) more than at later stages”, he said, adding “we have had rate actions during scheduled reviews like the one in June after the two cuts”. Why is it doing that? In June, it was at minus 2.4%. As on March 31, 2014, the stressed advances stood at 9.8% of the total advances. Money markets are barely pricing in a benchmark rate of 1 per cent by September next year.

At the same time, credit demand is weak and corporates and banks are grappling with a large number of stressed assets, particularly in the infrastructure sector. “It is a real concern for people having to consider an interest-rate rise”. The idea is to increase the profit margin between the cost of borrowing and the cost of lending.

Economists had previously been expecting an increase in rates in the middle of 2016 but Bank governor Mark Carney said in a speech that a decision about a rise would “come into sharper relief around the turn of this year”. Nobody wants that. He is also the author of Sahara: The Untold Story and A Bank for the Buck.

The RBI, however, is unhappy that commercial banks have delayed reducing lending rates. For now, the RBI’s strengths are being compared to Turkey’s heavily politicised central bank, but Indian market commentators are afraid that the new proposed MPC might undermine this favourable quality. Rajan, at a conference call with analysts, also said the central bank was looking at how inflation expectations at households were changing, rather than the levels themselves.