India’s central bank governor Raghuram Rajan kept the repo rate unchanged at 6.50 per cent at his final policy review on Tuesday after inflation hit a almost two-year high.
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· The cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities (NDTL).
Rajan also leaves behind another legacy as a outcome of the shift to the new framework for monetary policy-the government will not be able to pressure the governor on policy rates as decisions will now be a collective responsibility of the MPC. Rajan could also shift RBI policy focus to inflation-targeting and sign a fresh monetary policy mandate with the government a year ago.
The move was predicted by 27 of 29 economists in a Bloomberg survey, with two expecting a cut to 6.25 per cent. “Risks to the inflation target of 5 per cent for March 2017 continue to be on the upside”, the statement read. The strong sowing and the positive progress of the monsoon augurs well for the food inflation, RBI said, adding that prices of pulses and cereals are rising.
Policy repo and reverse repo rates remain unchanged at 6.5 per cent and 6 per cent, respectively. Reflecting the easy liquidity conditions, the weighted average call rate (WACR) and money market weighted average rate remained on average 15 basis points below the policy repo rate since June.
The other two MPC members from the RBI will, of course, be the Governor and the Deputy Governor.
Taking a clear stance over his tenure at the central bank, outgoing RBI Governor Raghuram Rajan said that he enjoyed every moment of it. However, the speculation is that Raghuram’s last paper might also have a small note of advice for his successor and the new monetary policy committee (which is still ambiguous) about the services, goods and the current short term fund policies. He has set a goal of limiting inflation to 5 percent by March 2017. At a time when the economy was growing at the slowest pace, Rajan was expected to cut rates and boost spending and demand. Accordingly, the RBI has retained the growth projection for 2016-17 at 7.6 per cent with the assessment that risks facing the economy at this juncture are evenly balanced around it.
“This is my last policy statement, but there are still 28 days in my term which I intend to use (up) fully”, he said.
The RBI held out the assurance that it would continue with both domestic liquidity operations and foreign exchange interventions to enable management of FCNR (B) deposit redemptions without market disruptions. A key programme, the ongoing Asset Quality Review, initiated by Rajan previous year, to push public and private sector banks to clean up their balance sheets of rising bad loans, will be watched carefully till its deadline ends in March 2017.
As far as his plans going forward are concerned, Rajan said he had not yet made any plans about involvement with Indian institutes.
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“We would be happier if there was more transmission”, he said, adding that RBI is sensitive to “some of difficulties” which banks have to face following the balance sheet clean-up.
