RBI Governor Raghuram Rajan sprang no surprises on Tuesday, keeping key policy rates unchanged. Having already cut the repo rate by 125 basis points this year, including a 50-point cut in September, the RBI adopted a cautious stand with only the promise of an accommodative approach going forward.

The central bank’s stand was widely expected by economists, bankers and fixed income market players in the backdrop of the impending hike by the US Fed later this month. Further, with Consumer Price Index-based inflation rising for the third month to touch 5 per cent in October, the RBI may have chosen to err on the side of caution.

With the RBI maintaining a status quo on the repo rate (the interest rate at which it provides liquidity to banks to help them overcome short-term liquidity mismatches) at 6.75 per cent and the cash reserve ratio (the slice of deposits that banks have to park with the central bank) at 4 per cent, banks are unlikely to cut deposit or lending rates.

At the post-Monetary Policy review press meet, Rajan observed that the central bank is always vigilant on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments. Inflation, according to the central bank, is expected to broadly follow the path set out in September, when it had projected inflation to reach 5.8 per cent in January 2016.

The RBI will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017. Rajan once again flagged the issue of transmission of policy rate cuts into lending rate cuts by banks. He pointed out that 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. The median base lending rate has declined only by 60 bps.

Indian Banks’ Association Chairman Ashwani Kumar said the bi-monthly policy was on expected lines. “In this policy thrust is given on inflation management. It is implicitly spelt out in the policy that managing the supply side factors both by the Central and State governments is crucial for managing inflation in future,” he said.

The growth projection for 2015-16 has been kept unchanged at 7.4 per cent with a mild downside bias. The Governor said the implementation of the 7th Pay Commission proposals, whereby Central government staff will receive a 23.55 per cent increase in salary, allowances and pension, will also be a factor in the RBI’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the government stays on the fiscal consolidation path.

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