Reserve Bank of India keeps repo rate unchanged at 6.75%

Reserve Bank of India keeps repo rate unchanged at 6.75%
Raghuram Rajan speaking during a news conference at the RBI headquarters in Mumbai on Tuesday. India's central bank kept interest rates on hold December 1, citing rising inflation and 'weakness' in Asia's third-largest economy despite recent growth.

Mumbai - Raghuram Rajan, the governor of the central bank, kept the cash reserve ratio unchanged at four per cent.



by

Nithin Belle

Published: Tue 1 Dec 2015, 11:00 PM

Last updated: Wed 2 Dec 2015, 11:25 AM

After cutting the benchmark repo rate four times since the beginning of the year, the Reserve Bank of India on Tuesday decided not to tinker with the rates. The repo was kept unchanged at 6.75 per cent.
Unveiling the fifth bi-monthly monetary policy statement, Raghuram Rajan, the governor of the central bank, also kept the cash reserve ratio unchanged at four per cent. Since January, Rajan - who was under intense pressure from the government and industry to reduce rates - has slashed the repo by 125 basis points.
Coming just a day after the government announced that second-quarter GDP had expanded by 7.4 per cent, even surpassing China's growth rate, Rajan chose not to touch the key rates. He maintained the RBI's growth projection for fiscal 2015-16 at 7.4 per cent, though "with a mild downside bias."
The RBI governor has been cautiously lowering interest rates, worrying about the impact of inflation. "As anticipated in our previous policy, retail inflation measured by the consumer price index (CPI) increased for the third successive month in October, pushed up by a surge in the monthly momentum," remarked Rajan. "Food inflation rose sharply in October, driven especially by pulses."
CPI inflation excluding food, fuel, petrol and diesel also rose for three consecutive months on account of price increases in respect of housing, recreation and amusement, and personal care and effects, he noted.
In the September bi-monthly monetary policy statement, the bank had assessed that the inflation target for January 2016 at six per cent was within reach. Consequently, it front-loaded its policy action in response to weak domestic and global demand that were holding back investment, while noting that structural reforms and productivity improvements would continue to provide the main impetus for sustainable growth.
Rajan said inflation was expected to rise further until December, before plateauing. "Although the seasonal moderation in prices of vegetables and fruits is expected to provide some respite, the El Nino induced shortening of winter may limit this effect," he pointed out. "The early indications of rabi sowing together with low reservoir levels suggest that astute supply management by the central government, including close coordination with state governments, is necessary to minimise any shortfall in the rabi crop." The central bank governor also referred to the Pay Commission proposals and its effect on wages and rents, noting that these would also be factored in for future deliberations.
Rajan has in the past been critical of the fact that banks have not been passing the reduction in interest rates to consumers and borrowers. "Since the rate reduction cycle commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks," he said. "The median base lending rate has declined only by 60 bps."
The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to. The government is examining linking small savings interest rates to market interest rates, he said. "These moves should further help transmission of policy rates into lending rates."
Leading ratings agency Crisil said the RBI would keep its policy rates unchanged for the rate of the fiscal, unless inflation surprises on the downside. "The RBI policy remains accommodative. In 2016-17, if inflation continues to move down the glide path, there will certainly be some room for further policy rate cuts."
The Federation of Indian Chambers of Commerce and Industry (FICCI) said the RBI's decision not to change policy rates was on expected lines.
- nithin@khaleejtimes.com

Governor of the Reserve Bank of India Raghuram Rajan attends a press conference in Mumbai, India, Tuesday, Dec. 1, 2015. Rajan on Tuesday kept key rates unchanged citing multiple factors, according to news reports. (AP Photo/Rajanish Kakade)
Governor of the Reserve Bank of India Raghuram Rajan attends a press conference in Mumbai, India, Tuesday, Dec. 1, 2015. Rajan on Tuesday kept key rates unchanged citing multiple factors, according to news reports. (AP Photo/Rajanish Kakade)

More news from Economy