The Reserve Bank of India (RBI) today kept its policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.75 percent and the cash reserve ratio (CRR) of scheduled banks at 4.0 percent of net demand and time liability (NDTL). “The uptick of…inflation…for two months in succession warrants vigilance”, RBI Governor Raghuram Rajan said in a statement published by local media.
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The RBI’s focus is on inflation, however, and it has predicted consumer price inflation will spike to 5.8 per cent in January, having struck record lows of around 3.6 per cent earlier this year, inflation was up to five per cent in October.
In line with market expectations, the Reserve Bank of India (RBI), on Tuesday kept key poilcy rates unchanged but affirmed the central bank’s accommodative stance considering inflation will likely perform better than expected. For instance, since January 2015, RBI has cut lending rates by 125 basis point, but banks have lowered lending rates by just about 60 basis points till now.
With the seventh pay panel’s recommendations of a 23.55 per cent hike in salaries leading to concerns on the impact on inflation in future, RBI said the government will have to do “appropriate budgetary tightening” to reduce the impact and it will be watching the space.
Accordingly, the reverse repurchase rate, or the interest paid by the central bank for short-term borrowings, also stood frozen at 5.75 percent.
Rajan had announced a strong 50 basis point cut in September when experts hoped for only a 25 basis point cut. “In 2016-17, if inflation continues to move down the glide path, there will certainly be some room for further policy rate cuts”. This move may have repercussions for India and other emerging markets, as a rise in the USA interest rate will encourage investment in US treasury bonds and USA dollar-denominated fixed income securities. “And our worry is that it should not come in the way of banks to pass through lower lending rates to customers”, Rajan said at the post-policy press meet. This increase in inflation is hardly a surprise, as in the fourth bi-monthly policy statement the RBI had already indicated that it expects inflation to increase from September onwards due to the reversal of favorable base effects.
RBI governor Raghuram Rajan said that the central bank this week would release the final guidelines on the methodology for determining the base rate.
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While the RBI maintained that weak global cues can weigh on the domestic economy and trade, the bank retained the 7.4 per cent projection for the current fiscal year with a mild downward bias.
