What makes this policy announcement different from the earlier ones is that th’ By Prof.
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Rajan, who has chose to return to academia after his three-year tenure ends on September 4, said Tuesday’s policy review was likely to be the last one to be Governor-led, as a the exercise would be conducted by new six-member panel going forward.
As he prepares to exit on September 4, he’ll turn over control of monetary policy to his successor and a new rate-setting panel. While the RBI chose to hold back from changing key interest rates again, borrowers can now only expect some relief from banks if they decide to pass through earlier policy rate cuts. This will also be the last meeting with a Governor fixing the policy. The other two members from the RBI will, of course, be the Governor and the Deputy Governor in charge of monetary policy.
Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday cautioned the general public against emails that claim to provide monetary rewards from the central bank on the pretext of phony schemes.
Rajan took the RBI reins in September 2013 at a time when India’s economy was struggling with a ballooning current account deficit, a plummeting currency and decade-low economic growth. “I have a suspicion that some new concern will crop up once FCNR redemptions are behind us”, Rajan said. This is the second review in a row when Rajan has maintained the status quo. The macroeconomic conditions of the country by and large was demanding that.
The government last week formally adopted Rajan’s consumer price inflation policy of four percent in a bid to help moderate future price rises.
The statement mentions risks to five per cent inflation target of March 2017 continue to be on the up side. The full implementation of the recommendations of the seventh Central Pay Commission on allowances will affect the magnitude of the direct effect of house rents on the CPI, which can push up inflation.
With inflation touching a 22-month high at 5.8% and the impact of the Seventh Pay Commission still to pan out, the RBI on Tuesday chose to hold rates until there was more certainty. Thus, in our view, room for one more policy rate cut could transpire in the last quarter of 2016.
Thus, October onwards the liquidity situation is expected to worsen. Markets were not expecting cuts in policy rates: Rajan lived up to those expectations. Eventually Rajan chose to exit the central bank after a ruling-party lawmaker said he was “mentally not fully Indian” and kept interest rates unnecessarily high. The cash reserve ratio (CRR) that scheduled banks have to keep in liquid funds also remains unaltered at 4 per cent of deposits. RBI maintained its projection of 7.6 per cent on a gross value addition basis, mainly due to the favourable monsoon which is 3 per cent above the average now, which raises agricultural growth and rural demand.
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But the RBI flagged on Tuesday that there were “upside risks” to that 5 percent target. However, given the sticky services sector inflation and a likely boost in rural consumption, the fall in headline inflation is unlikely to be drastic enough to encourage more than one policy rate cut in FY17.
