In its fifth bi-monthly monetary policy review of the current fiscal conducted by Reserve Bank of India Governor Raghuram Rajan here, the repurchase rate at which short-term credit is extended to commercial banks was left unchanged at 6.75 percent.
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New Delhi, Dec 1 India Inc on Tuesday termed the Reserve Bank of India’s (RBI) move to hold policy rate at 6.75 percent as on expected lines.
“While oil prices, barring geopolitical shocks, are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance”. “As anticipated in our previous policy, retail inflation measured by the consumer price index (CPI) increased for the third successive month in October 2015, pushed up by a surge in the monthly momentum.
Taking all this into consideration, inflation is expected to broadly follow the path set out in the September review with risks slightly to the downside”, he said.
The bank had, in its September meeting, cut the growth projection to 7.4 per cent from 7.6 per cent. Although the RBI is maintaining a downward bias on its projection, the finance ministry in a press note released today said it expects the economy to grow in the vicinity of 7.5 per cent.
“It makes sense to stick with the status quo until we get clarity”, the senior economist at Dun & Bradstreet, told AFP.
Rajan reiterated his hope that Indian banks will clean up their balance sheets [of bad loans] by March 2017.
However, there is a subtle difference between its latest policy, unveiled on Tuesday, and the last, on 29 September. Apart from that, the proposed pay hike of the central government employees will have an impact on inflation and fiscal deficit although the government can neutralise its direct effect on aggregate demand by budgetary tightening if it does not deviate from its commitment to fiscal consolidation.
According to Rajan, the government was considering linking small savings rate – a factor deterrring rate cuts by banks – to market rates.
But India’s economy, which is the fastest growing in the world at 7.4 per cent, is also wary of the effects of expected US Federal Reserve rate hikes later this month. Given this tide of inflation, the RBI is then likely to wait for this wave to settle down before any further monetary easing.
Rajan believes the move would help banks to pass on the RBI rate cuts to end-customers without delay.
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Earlier in the day after keeping the key rates unaltered, Governor Rajan made his displeasure known for banks not doing enough on transmission, saying they have passed less than half of the cumulative 1.25 per cent repo rate cut by RBI in 2015.
