Mumbai: The Reserve Bank of India, on Tuesday, kept the indicative policy rate (Repo) unchanged at 7. 25 per cent, citing the delay in transmission of earlier rate cuts by banks and the continuing inflationary pressures in the economy.
The RBI had cut rates from a peak of 8 per cent to 7.25 per cent in three tranches in this calendar year – January 15, March 4 and June 2. It also retained the cash reserve ratio (CRR) at four per cent. It trimmed the retail inflation forecast for January-March 2016 by 0.2 per cent.
Even though a rate cut was not expected widely by the markets, the benchmark 30-share Sensex dipped by 115.13 points to close at 28071.93. The rupee, in the meanwhile, strengthened further to 63.74 a dollar compared to 64.04.
Repo rate is the rate at which banks borrow funds from the central bank. CRR is the portion of deposits which commercial banks have to hold as reserves either in cash or as deposits with the central bank.
“We are looking for whether the recent increase in inflation is temporary and whether the monsoon will continue to be near normal,” said Raghuram Rajan, Governor, RBI, while addressing a press conference here to announce the third bi-monthly monetary policy.
“It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” Dr. Rajan added.
According to the RBI, this implies that inflation projections for January-March 2016 are lower by about 0.2 per cent with risks broadly balanced around the target of six per cent for January 2016.
“We will await greater transmission of our past front-loaded actions (rate cuts) while we look and monitor developments for emerging room for more accommodation,” he added.
The RBI had cut rates from a peak of 8 per cent to 7.25 per cent in three tranches in this calendar year – January 15, March 4 and June 2. While the last rate cut was implemented in the second bi-monthly policy, the earlier two cuts were announced outside the policy. The Governor reminded that the RBI could take monetary actions any time it wanted.
Food inflation rose by 60 basis points over the preceding month, driven by a spike in prices of vegetables, protein items, especially pulses, meat and milk – and spices, he said.
The momentum of price increases remained high for education, said Dr. Rajan. According to him, inflation pressures increased for personal care and household goods and services. “Near-term inflation expectations of households returned to double digits after two quarters”, he added.
“As loan demand picks up in third quarter of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place,” said Dr. Rajan. He also welcomed the announcement by Government of infusion of capital into public sector banks, which, he said, “will help loan growth, and, hence, transmission”.
The outlook for growth was improving gradually, said Dr. Rajan, adding favourable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continued to improve. The projected output growth for 2015- 16 has been retained at 7.6 per cent.
On the other hand, he said, global growth projections for 2015 had generally been revised downwards and, therefore, “the export contraction could become a prolonged drag on growth going forward.”
Notwithstanding some improvement in the state of stalled projects, RBI said that “supply constraints continue to be binding, and new investment demand emanating from the private sector and the central Government remains subdued.”
