Money & Banking

As inflation projection remains high, RBI may hold repo rate

Our Bureau Mumbai | Updated on January 23, 2018 Published on August 27, 2015

RBI Governor Raghuram Rajan

Uncertain monsoon still a risk to growth

The Reserve Bank of India may continue to hold its policy repo rate steady, going by its annual report for 2014-15.

Reason: Inflation projections for January 2016 (as of early August 2015) are still at the upper limits of its inflation objective of 6 per cent.

The RBI had left the policy repo rate (the interest rate at which it provides short-term liquidity to banks) unchanged at 7.25 per cent in the third bi-monthly policy review on August 4. The next policy review is due on September 29.

In the calendar year so far, the central bank has cut the repo rate by a cumulative 75 basis points.

Recent gains in reducing inflation pressures need to be built upon so that disinflation continues along with higher growth, the RBI said.

While the progress of the monsoon has allayed initial fears of moisture shortfall, uncertainty surrounding the progress and distribution of the monsoon remains a risk to the outlook for both growth and inflation.

According to RBI, despite the immense efforts in recent years of both the Government and RBI to restore macroeconomic stability to the economy, three areas — economic growth, inflation, and lending rate cuts by banks, are still “work in progress”.

“First, economic growth is still below levels that the country is capable of. Second, inflation projections for January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates is muted,” the annual report said.

Inflation target

Going forward, the focus of the Reserve Bank’s monetary policy stance during 2015-16 will be on fostering a gradual and durable disinflationary process towards the target of below 6 per cent by January 2016. This is in order to achieve the centrally projected rate of 4 per cent by the end of 2017-18.

At the same time, the RBI said the efficacy of the monetary policy transmission mechanism needs to improve since the pass-through of recent cuts in policy rate to the bank lending rate has been partial, reflecting constraints in transmission under the existing base rate system.

Published on August 27, 2015
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