As was widely expected, Reserve Bank of India Governor Raghuram Rajan on Tuesday chose to keep the policy repo rate unchanged on inflation concerns even as it emphasised that it continues to be accommodative.

The policy repo rate (the interest rate at which the RBI provides liquidity to banks to tide over short-term liquidity mismatches) is currently at 6.75 per cent.

While inflation has evolved closely along the trajectory set by the monetary policy stance and the January 2016 target of 6 per cent should be met, the RBI said 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 fiscal 2016-17.

Pay Commission award

However, it cautioned that the implementation of the VII Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years. The Reserve Bank will adjust the forecast path as and when more clarity emerges on the timing of implementation.

Vagaries in the spatial and temporal distribution of the monsoon and the impact of adverse geo-political events on commodity prices and financial markets add additional uncertainty to the baseline (inflation projection).

The Reserve Bank reiterated that it continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation.

Structural reforms in the forthcoming Union 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 2016-17, the central bank said.

The central bank cut the repo rate by 125 basis points in 2015, including by a bigger-than-expected 50 bps in September. It held rates at its last meeting in December.

The RBI Governor had warned on Friday that straying from fiscal consolidation and easing up on the fight against inflation would jeorpardise the country's economic stability at a time of global market turmoil.

Fast facts

Repo rate unchanged at 6.75%

CRR unchanged at 4%

Bank Rate, MSF rate unchanged at 7.75%

Forecasts growth to strenghten gradually in FY17...GVA growth rate at 7.6%

RBI says January target of 6% CPI inflation "should be met"

Forecast inflation rate around 5% by end of FY17

Keeps GVA growth rate of 7.4% in FY16 with downward bias

Budget will create more room for RBI in terms of monetary policy

Commentary

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCE HOLDINGS, MUMBAI:

"Given the flexible inflation targeting framework that we have formally adopted, I don't see any scope for rate reduction beyond 25 bps which may happen around Budget time only after the RBI is convinced about the fiscal consolidation roadmap of the government. It may happen outside the policy also if the RBI feels the government has stuck to its fiscal deficit target, just to endorse the action.

"The RBI cannot take contradictory measures by not reducing repo rate and then infusing liquidity. Liquidity tightness has happened due to mismatch between demand and supply."

(With additional reporting from Agencies)

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