RBI Monetary Policy Review: Interest Rate Unchanged Citing Economic Recovery

Meanwhile, RBI on Tuesday kept the repo rate, at which it lends to the system, unchanged at 7.25 per cent and the cash reserve ratio, which is the proportion of deposits banks have to park with the central bank, at 4 per cent. The move was predicted by 39 of 42 economists in a Bloomberg News survey.

As the RBI awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation, Rajan said while announcing the third bi-monthly policy review of the current fiscal.

It said the most worrisome aspect is the sustained hardening of inflation excluding food and fuel though prices of pulses and oilseeds have pushed up a bit. Any future revisions will depend on how far banks reduce their lending rates and the way inflation pans out, the central bank said.

The issue about transmission of rate cut has not just been highlighted by the Finance Ministry but also by the RBI.

“RBI believes institutionalising the process of monetary policy formulation is vital, given that the government has given RBI a clear inflation objective”, Rajan said. Meanwhile, annual inflation decreased slightly in Japan to 0.4 percent in June, after the 0.5 percent year-on-year increase recorded in May.

India’s benchmark 10-year bond yield was largely unchanged after the RBI decision. Notwithstanding some improvement in the state of stalled projects, the RBI said that supply constraints would continue to be binding, and the new investment demand emanating from the private sector and the Central Government would remain subdued.

Inspite of the RBI’s cuts earlier in the year, industrial growth slumped to 2.7 per cent in May.

With wholesale price inflation continuing to tread in the negative zone for the eighth consecutive month, and calls for rate cuts thereof getting shriller, Rajan said the RBI prefers to formulate its policies based on CPI which gives a better picture of the pinch at the individual level.

Listing out “three virtues” of taking the monetary policy decision away from the Governor and giving it to a committee, Rajan said that when a committee decides on rates, it lessens the pressure on individual and also ensures continuity in policy when any single member of a committee changes. “While the details have to be ironed out, there are no differences between the government and the RBI in this matter”. In Britain, the annual consumer price inflation rates are zero in Britain. Some-including rising non-oil and non-gold imports and accelerating vehicles sales-point to stronger demand, while others-such as weak corporate earnings-suggest growth is still soft, despite official GDP figures indicating otherwise. “The biggest hurdle is private investment”.

It comes after Mr Carney last month warned that consumers and markets should expect a base rate rise around the turn of the year.