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RBI’s Rajan holds rates in final policy review

By TEAM VCC

  • 09 Aug 2016
RBI’s Rajan holds rates in final policy review
Other | Credit: Reuters

Reserve Bank of India governor Raghuram Rajan kept interest rates unchanged on Tuesday in his last policy review before he returns to academia next month.

The widely expected decision comes as retail inflation has accelerated to nearly touch the upper limit of the RBI's 2-6% target range.

Rajan maintained the repo rate—at which it lends to banks—at a five-year low of 6.5% and the cash reserve ratio—the amount of deposits banks must keep with the RBI—unchanged at 4%. But he said the stance of monetary policy remains accommodative.

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“The recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year,” Rajan said in the policy statement. 

Rajan said the monsoon’s steady progress, along with supply management measures, augers well for the food inflation outlook. But the prospects for inflation excluding food and fuel "are more uncertain", he said, and cited any rise in crude prices as a risk. 

The full implementation of the recommendations of the 7th central pay commission could also weigh on inflation, he said. "On balance, inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside, are retained," he added.

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Inflation has been accelerating over the past couple of months. According to government data, retail inflation in India quickened in June for a third straight month to a 22-month high of 5.77% as food prices turned costlier. 

Last week, the government notified 4% inflation target with a range of plus/minus 2% for the next five years under a monetary policy framework agreement with the RBI.

This is the second successive policy review where Rajan has held rates; inflation fears had prompted him to stand pat in June as well. 

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Still, Rajan has slashed interest rates 150 basis points since January 2015. This includes the 25-basis-point reduction in its last policy review in April.

This is also the last policy review decided by the RBI governor. Future policy reviews will be decided by a monetary policy committee comprising central bankers and government nominees.

Rajan also said the growth momentum is likely to be strengthened by a normal monsoon raising farm growth and rural demand as well as by the stimulus to consumption spending after implementation of the pay panel's report to hike wages and pensions for government staff. 

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However, he pointed out successive downgrades to global growth projections by multilateral agencies and sluggish world trade to retain the growth projection for 2016-17 on gross value added basis at 7.6%. Still, this will be higher than the 7.2% growth in GVA for 2015-16.

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