Rajan holds rate; lobs ball to govt court, awaits Budget cues

Putting the ball in government's court, RBI Governor Raghuram Rajan today kept the key interest rate unchanged amid inflation and growth concerns, saying that further easing will depend on "structural reforms" in the forthcoming Budget as well as macroeconomic factors.
He said the government has suggested a number of steps to make the economy more flexible, create growth opportunities as well as incentivise investments, and these are the reforms that the Reserve Bank will be look at in the forthcoming Budget to be announced on February 29.
"Structural reforms in the forthcoming Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of FY17," Rajan said in the sixth bi-monthly monetary policy review.

Although he left the repo rate unchanged at 6.75 per cent, Rajan said RBI continues to be accommodative, while it awaits further data on the development of inflation. It had cut the lending rate last year by 125 bps in 4 installments.
"One of the biggest sources of concerns in the economy today is the services sector inflation because there is limited capacity for example in education, healthcare," Rajan told reporters at the customary post-policy press conference.
There could be steps to encourage more training and skilling, he said.

"So, whether the government takes some steps in that direction...All those are structural reforms that could help in a particular area we are interested in which is lowering the pace of inflation overtime," he added.

The decision to keep repo rate on hold is based on the inflation trajectory which is moving along the set path, he said, adding that if the data supports it, RBI will be accommodative.
"Broadly, I don't think it is fair to read that we have become more hawkish over time. I think broadly speaking the positives are balanced by the negatives. There has been some movement downwards in oil prices...There are some risks which can also pull inflation downside such as a good monsoon next year," he said.
On the inflation trajectory, he said, "with unfavourable base-effects on the ebb and benign prices of fruits and vegetables and crude oil, the January 2016 inflation target of 6 per cent should be met.

"Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and be around 5 per cent by the end of FY17".
Following the policy review, the BSE Sensex was trading more than 300 points down shortly before the close of trade.