RBI tracks CPI, or retail inflation, in deciding its monetary policy action.
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“The latest capital support provided by the government to the public sector banks should enable effective transmission into lower lending rates”, she added. Under the current system, the RBI Governor does have the power to veto the advice received from the committee, but, he said, it was not right to empower a single individual thus.
Still, RBI’s statement indicated that it was willing to consider more rate cuts. Also, in the absence of a marked improvement in the economic environment, industry and commerce can not be undergoing any hardship due to the high lending rates.
India’s pause contrasts with easing from China and Russian Federation even as Asia’s third-biggest economy shows mixed signs of strength. Many on the street believe that the RBI is treading too cautiously and believe that a rate cut from the central bank could push growth in the economy.
“The outlook for growth is improving gradually”. Meanwhile, RBI Governor sounded optimistic about the economy, pegging the growth rate for 2015-16 at 7.6 percent.
RBI Governor Raghuram Rajan said that the headline inflation is at elevated levels and banks are yet to pass on the full benefits of previous rate cuts.
The Indian markets look set to open largely unchanged on Wednesday, tracking lackluster cues from global markets as speculation grew that the Federal Reserve is on course to raise interest rates as early as September. “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. “We have been enthusiastic supporters of a committee”, said Rajan. “In this period of turmoil, everyone is prepared but we can’t rule out volatility”, he said referring to the ongoing fiscal consolidation and comfortable foreign exchange reserves. We are fully cognizant of the fact that transmission takes place slowly.
“Monetary policy is not like a lever you press and then you get immediate action”.
“The rates have been kept on hold as expected”. What we really need to do is to bring inflation down.
Food prices led by pulses pushed inflation to 5.4 per cent in June, faster than estimated though below Rajan’s target for a tenth straight month.
“The policy is a little more dovish than anticipated in the sense, they are looking for space to come up with an accommodative policy”. However, he did not commit to a time-frame for this.
The country’s largest lender State Bank of India (SBI) said RBI’s forward guidance spells out possibility of more monetary accommodation. Bond prices and yields move in opposite directions. But India’s HDFC Bank (HDB) is down 0.6% this morning in U.S. trading.
Whereas the decision to leave rates unchanged this time was widely expected, economists polled by Reuters before the review were evenly split over chances for reduction by the end of the year.
The governor noted that while “overall business confidence is positive” with consumer demand picking up, he stressed that India’s “economic recovery is still work in progress”.
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Higher reservoir levels also auger well for the prospects of kharif output, particularly for areas that are dependent on irrigation, it said.
