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RBI holds rates, leaves door open for more softening
“At that point, the decision on what to do with interest rates becomes more complicated”, said Robert Wood, a former BoE forecaster who is an economist at Bank of America Merrill Lynch.
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The SBI chairperson, Arundhati Bhattacharya, told reporters here that she does not see any room for a cut in the near future.
“I don’t think there will be any rate cuts before December”, said Sagar Shah, the vice president of treasury at RBL Bank Ltd.in Mumbai. However, THE most worrisome factor is the hardening in the non-food and fuel inflation and also added that the impact of the hike in service tax rates to 14 per cent effected in June will flow into the inflation reading through the year, he said.
While the central bank has snipped the repo rate thrice this year by 25 basis points (bps) each, retail banks have been reluctant to pass on the benefits to the consumers.
Rajan reiterated that there are no differences with government on monetary policy review. 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.
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Prinn Panitchpakdi, country head at CLSA Securities (Thailand), said the MPC would maintain the benchmark rate as this was still a transitional period following the consecutive cuts in March and April, and the central bank could afford to wait as a US interest-rate hike was seen as most likely not taking place before December.
Under the present system, the Reserve Bank Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.
The Reserve Bank of India, governed by Raghuram Rajan, maintained its repo rate at 7.25 percent and the reverse repo rate at 6.25 percent.
Under a target declared as part of a newly announced inflation-targeting framework, RBI is targeting to hold the inflation under 6 per cent by January next year, which many analysts feel is possible. “From the RBI’s side, we wanted to ensure the structure should ensure continuity in policy as the market attempts to understand the voting patterns of new MPC members”, he said. A renewed fall in oil prices and expectations in markets that the BoE will raise rates sooner than it had envisaged in May could also slow the rise in British inflation.
After discussions, the RBI will formulate a framework to raise the investment limit for such investors in government debt securities, which will be pegged to the rupee against the current practice of linking it to the dollar, he said.
Since the last policy review in June, the average price of Brent crude has come down by about 15%, from $65 a barrel to $54.
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The banks, however, have passed on only 0.3 per cent to borrowers, Rajan said. It said capacity utilisation (CU): At the aggregate level, capacity utilisation recorded seasonal increase in fourth quarter of 2014-15 and stood at 75.2 per cent, below its level during the same quarter of the previous year. Three successive rate cuts have not had much impact on bond yields because of lack of demand with FIIs nearing their buying capacity limit.