As expected Rajan keeps interest rates static
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Faced with an uptick in inflation, Raghuram Rajan on Tuesday left interest rates unchanged at his final policy review meeting as RBI governor said a report in the Business Standard..
Rajan left the repurchase, or repo, rate unchanged at 6.5% as retail inflation for the month of June headed to 5.77%, driven in large part by a spike in food inflation which has the most weightage in the basket of goods used in the Consumer Price Index (CPI). The Cash Reserve Ration (CRR) was also left unchanged at 4%.
As a result, the reverse repo rate under the Liquidity Adjustment Facility (LAF) remains unchanged at 6.0% while the marginal standing facility (MSF) rate and the Bank Rate is at 7.0%.
However, Rajan can take solace in the fact that the Indian monsoon has been more than plenty this year, leading to a better sowing averages. Promises of a better harvest also mean that food inflation could come down in the coming months, creating some space for his successor to cut rates later in the year.
Also, the central government has agreed to adhere to an inflation target of 4% (plus/minus 2%) over the next years to 2021. The target is seen as a big win for the outgoing RBI governor, who had been pushing for such a move.
The government and the RBI had last year reached an agreement on a monetary policy framework that had set the inflation target at 4 per cent, plus or minus 2 per cent. However, there was no legal backing to it.
Since January 2015, when inflation showed signs of cooling amid a global decline in demand and prices, especially crude oil, Rajan had shaved off nearly 150 basis points from the repo rate in a bid to steer cheaper money for investment and growth.
However, banks have not been as enthusiastic about passing on those cuts, largely because of their own problems with ballooning non-performing assets and tighter scrutiny of who they lend to.
The RBI also left its growth projections for the Indian economy unchanged at 7.6% for the financial year ending March 31, 2017.
