Reserve Bank of India (RBI) Governor Raghuram Rajan kept key policy rates unchanged in his last monetary policy review on Tuesday with little elbow room for easing due to the country's retail inflation inching closer to the upper tolerance level of 6 per cent.
The repurchase (repo) rate, or the interest commercial banks pay the central bank for short-term loans, remains unchanged at 6.5 per cent. The cash reserve ratio (CRR) that scheduled banks have to keep in liquid funds also remains unaltered at 4 per cent of deposits.
In the previous policy update, too, conducted on June 7, the policy rates were left unaltered.
"Recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year," Rajan said. Strong improvement in sowing on the back of good monsoon rains and supply-side management auger well for food inflation outlook, he added.
"In view of this configuration of risks, it's appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for action. The stance of monetary policy remains accommodative and will continue to emphasise adequate provision of liquidity."
Rajan also said easy liquidity conditions are now prompting banks to modestly transmit the past policy rate cuts of the central bank on to customers and that pro-active liquidity management by them should facilitate more such pass-through.
The stock markets, which had opened on a positive note on Tuesday, took a sharp dip after the policy announcement. But they recovered some ground eventually.
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The sensitive index (Sensex) of the BSE had opened nearly 110 points, or 3.8 percent up, but soon fell into the negative zone. At 11 a.m, when the policy was announced, it fell nearly 85 points, but recovered ground immediately.
It eventually closed 97.41 points or 0.35 per cent down at 28,085.16 points.
Tuesday's policy update will also be the last one that will afford the central bank governor the liberty to fix policy rates, with the government set to entrust such a task with a soon-to-be-constituted Monetary Policy Committee, facilitated by amending the statute.
The target inflation rate has already been set at 4 per cent -- plus or minus 2 percentage points. Against this, the central bank retained the inflation projection of 5 per cent by March 2017 with risks tilted to the upside.
On growth, Rajan said the momentum was expected to be quickened by the normal monsoon that should raise agricultural output and rural demand. A stimulus to consumption spending was also expected on account of the Pay Commission award.
"The passage of the Goods and Services Tax (GST) bill also augurs well for the growing political consensus for economic reforms," he said, but added timely implementation will be challenging. On the whole, he said, this new tax regime should boost government finances and investor mood.
Since January 2015, when the central bank started seeing improvement in the economy and external factors, the short-term lending rate has been cut by 150 basis points -- the last one on April 5 of 25 basis points. During his tenure, Rajan has raised the rates thrice and cut them five times.
India Inc on Tuesday appreciated Reserve Bank of India's (RBI) decision to keep key policy rates unchanged and stick to the inflation target of four per cent
According to the Federation of Indian Chambers of Commerce and Industry, the government's decision to stick to the inflation target of four per cent is positive, and in this context, a further push to demand through lowering of interest rate would have translated into higher investments.
Harshavardhan Neotia, President, FICCI said the industrial sector requires continuous focus and while capacity utilisation rates have improved in a few segments, higher investments call for a sustained uptick in demand.
"FICCI would also like to reiterate that the process of transmission of earlier rate cuts by banks remains slow," said Neotia.
"As mentioned in the statement, we hope Reserve Bank of India would continue to work on improving the pass through of the previous rate cuts."
Another business chamber Assocham (Associated Chambers of Commerce of India) said while the RBI decision to keep the policy interest rates unchanged is on the expected lines in the face of consumer inflation staying sticky, Rajan's remarks on possibility of positive impact of monsoon on inflation and continuing accommodative stance towards interest rates augur well for achieving sustainable growth.
The chamber further said it also looks forward to formation of an institutional framework for deciding the policy interest rates in sync with inflation and growth, through a Monetary Policy Committee.
"At the core of the monetary policy, is the desire to see a sustainable growth rate along with empowering the banks to lend more at competitive rates," Assocham Secretary General D.S. Rawat said.
"We hope a commendable job of cleaning up the banks' of their toxic assets would be carried forward by the new RBI Governor," Rawat added.
Industry body PHD Chamber of Commerce and Industry elaborated that it expect a significant repo rate cut in the future to facilitate the competitiveness of the manufacturing sector.
"Going ahead, we expect a significant cut in repo rate to facilitate the competitiveness of the manufacturing sector and to compete in the international market," Mahesh Gupta, President, PHD Chamber of Commerce and Industry was quoted in a statement.
Gupta cited that that exists a lot of scope to reduce the repo rate as good monsoon is visible and inflationary expectations are also benign.
"At this juncture, economy should be supported by lower interest rates to enhance the demand for durables and to boost up the manufacturing sector," Gupta added.
--IANS
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