The Reserve Bank of India (RBI) left all policy rates unchanged at its fifth bi-monthly monetary policy review today, amidst lingering inflationary pressures, after having cut the repo rate by a sharp 50 basis points at its previous meeting. Given the macroeconomic situation, Rajan said in his policy statement that the central bank has made a decision to keep the policy repo rate unchanged at 6.75 per cent and to maintain the cash reserve ratio (CRR) at 4% of demand and time deposits.
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The RBI has also kept economic growth projection unchanged at 7.4 percent for FY16.
“The precondition for the next rate cut will be fiscal consolidation, passage of key economic reforms and food inflation behaving well”, said Gaurav Kapur, a senior economist in Mumbai at Royal Bank of Scotland Group, ranked first by Bloomberg for predicting Reserve Bank of India (RBI) actions over two years.
A variety of consumers loans are related to the fed funds rate, therefore, certain sales of goods such as autos or appliances could be narrowing off.
“Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks”. The RBI has said that the policy stance is “accommodative” which means that there is more room for rate cut in coming months. Back in September CPI inflation was at just 4.41 percent; however, according to the latest data released by the Indian Ministry of Statistics & Programme Implementation (MOSPI) a provisional inflation figure of 5.00 percent in October was reported.
He said the credit policy review has rightly raised a concern about the possible impact of the Seventh Pay Commission on quality government expenditure.
Rajan said he would to act to make sure that banks pass rate cuts on to their customers.
Having posted 7.0 percent year-on-year growth in gross domestic product during the June quarter, the economy is improving, but the government’s target of 8.0 to 8.5 percent for the fiscal year ending March looks a long way off.
The RBI in fact expects inflation to rise further until December.
Experts believe the U.S. central bank may hike rates later this month, which will further strengthen the dollar and trigger capital outflows from emerging markets like India.
The RBI has assessed that the inflation target for January 2016 aimed at 6% was within reach. The uncertainty looming over a Fed rate hike suggests that the RBI may adopt a wait and see approach before making any further rate cuts.
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The RBI said it would soon announce a new methodology that will force lenders to set lending rates based on their cost of funding, taking away some of their freedom in setting rates.
