As was widely expected, the outgoing Reserve Bank of India Governor Raghuram Rajan maintained status quo on the policy rate in his last policy review on Tuesday.

The repo rate (the interest rate at which the central bank provides short-term liquidity to banks to help them overcome liquidity mismatches) was left unchanged at 6.50 per cent. Rajan's three-year term at the helm of RBI comes to an end on September 4.

With retail inflation ruling above its projection of around 5 per cent for FY2017, the RBI held the rate steady.

In the current financial year, the RBI last cut the repo rate in its first bi-monthly monetary policy review, in April by 25 basis points to 6.50 per cent.

Inflation

The RBI, in a statement , said the recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year. Moreover, prices of pulses and cereals are rising and services inflation remains somewhat sticky.

There are early indications, however, that prices of vegetables are edging down.

"...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," the RBI said.

Going by the latest government data, the year-on-year retail (consumer price index-based) inflation reading came in higher at 5.77 per cent in June 2016 as against 5.40 per cent in June 2015. CPI is used by the central bank as a nominal anchor in formulating monetary policy.

Risks to inflation target

The central bank said risks to the inflation target of 5 per cent for March 2017 continue to be on the upside. Furthermore, while the direct statistical effect of house rent allowances under the 7th Central Pay Commission’s award may be looked through, its impact on inflation expectations will have to be carefully monitored so as to pre-empt a generalisation of inflation pressures. In terms of immediate outcomes, much will depend on the benign effects of the monsoon on food prices.

In view of this configuration of risks, it is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. The stance of monetary policy remains accommodative and will continue to emphasise the adequate provision of liquidity.

Rate cut transmission

The RBI Governor expressed unhappiness with the transmission of rate cuts by banks. He said that banks have passed interest rate cut modestly and keep finding new reasons for not doing so. "I have suspicion that some new reasons will come up after we address FCNRP issue," Rajan said. RBI plans to announce guidelines for P2P lending soon and also new measures for the corporate bond market.

Banks doing well on NPAs

Rajan said that the RBI is comfortable with the recognition process and banks have taken lot of steps to address NPAs. "Some banks have taken more steps so culture of cleaning up is well embedded. What remains is for large stressed projects to restructure. There are a number of RBI schemes available. We are working with banks to rectify any impediments. We do not want to go to the days of forbearance," he said.

On GST

Premature to talk about inflationary impact of GST. Experience of other countries shows there was inflationary impact, but short lived. A lot depends what prices go up and which down. The RBI is currently focused on meeting glide path of 5 per cent by March 2017. We do not visualise GST coming before April 2017. About 55 per cent of CPI basket will not be impacted by GST. The full impact will perhaps be seen second half of next financial year.

Related Topics
comment COMMENT NOW