Promising continuity of “accommodative” monetary stance, Reserve Bank of India Governor Raghuram Rajan on Wednesday said the country was prepared to face any adverse impact from the global slowdown but the government must provide clarity on reforms to send a strong message to investors that “India is on the move”.
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As the RBI awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation, Rajan said while announcing the third bi-monthly policy review of the current fiscal. “CII is of the view that the policy of frontloading the interest rate cuts should have been allowed to continue”, CII Director General Chandrajit Banerjee said.
Gilt yields opened sharply higher after comments overnight from top U.S. Federal Reserve official Dennis Lockhart, who said growth in the world’s biggest economy was on track for him to vote for higher interest rates in September.
After Tuesday’s announcement the repo rate, or the rate at which the central bank lends commercially, was unchanged at 7.25 percent and the reverse repo rate, at which the bank borrows from local banks, stays at 6.25 percent.
India last experienced double-digit inflation in November 2013.
“RBI believes institutionalising the process of monetary policy formulation is vital, given that the government has given RBI a clear inflation objective”, Rajan said.
While most economists in a separate survey see Rajan keeping rates unchanged in the coming months, before Tuesday’s decision swap traders were pricing in the chances of a cut to seven per cent by end-2015. SLR is the reserve requirement that commercial banks are expected to maintain in the form of cash, gold or government approved securities before providing credit to the customers.
The repo rate was unchanged at 7.25%.
Turning to the balance of inflation risks, RBI said “most worrisome” is the sustained hardening of inflation excluding food and fuel. “Considering hazy picture on retail inflation, or consumer price index (CPI), too has inched up to 5.4 percent over the past month”, he added. Its guidance may signal a stance that the rate cut cycle is not just over as yet.
“Given the awaken sentiments in the market, but, RBI could have further pulled the wave by easing key rates a bit”, Mr. Gaur said.
He further said that while the details of the monetary policy committee (MPC) will have to be ironed out, “there are no differences between RBI and the government” on this matter.
RBI retains growth target at 7.6 per cent for 2015-16: “The outlook is improving gradually”.
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Apparently, Rajan has ignored pressure to loosen policy, citing a spike in food prices and banks not lowering their rates even after three cuts totaling 75 bps by him.
