Springing no surprises, the (Reserve Bank of India) RBI governor Raghuram Rajan kept interest rates unchanged on Tuesday, moving on expected lines, he kept the repo rate unchanged at 6.5 per cent, reverse repo rate stays at 6 per cent and the cash reserve ratio (CRR) also remained unchanged at 4 per cent.



“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain… rising crude prices and implementation of the seventh pay commission awards being the key risks,” Rajan said.



This comes at a time when India Inc was largely resigned to the fact that the RBI might keep interest rates unchanged  given high retail inflation and a recent spike in oil and vegetable prices, and was keener and more desperate in fact to know whether the man of the moment Raghuram Rajan will stay or go especially as both currency and bond markets have already reacted negatively to his rumoured departure. A report in the Deccan Chronicle on Tuesday morning said that the Prime Minister’s Office (PMO) is learnt to have approved his continuation for another three-year tenure and a notification on this is likely to be issued by the end of this month.


Read more: India Inc desperate to know if Rajan will stay or go


"It will be cruel of me to spoil the fun the press has been having over my tenure, I am quite intrigued by the many letters I have supposedly written on the issue, the extension of my tenure will be known at an appropriate time and I dont want to say anything different than what the Prime Minister and the Finance Minister have already said," said Rajan while addressing his customary press conference after the monetary policy announcement in Mumbai.



Meanwhile, the Sensex shot up nearly 100 points ahead of the policy announcement and latest official data showed that India was one of the world’s fastest growing economies in the March quarter, with GDP growing at a rate of 7.9 per cent. Earlier after a gap of six months, the RBI had cut repo rate, at which it lends to other banks, by 0.25 per cent to 6.5 per cent in April.




This time around though it was widely expected that RBI will keep key rates unchanged while signalling the prospect of another rate cut later this year if monsoon rains dampen upward pressure on food prices. RBI's hawkish stance is an outcome of the annual consumer price inflation accelerating to 5.39% in April which was above Rajan’s near-term target of five per cent by March 2017, crude prices are well off January’s more than 12-year lows and are upto $50 now, a US rate hike is anticipated, and any shortfall in rain could ignite food prices say economists. Thus 44 economists polled by Reuters recently predicted that RBI will leave rates unchanged for now.


Economists  are of the view that RBI's main focus is now on ensuring that the broader economy feels the benefit of the more than 150 basis points that have already been sliced since the start of 2015. The central bank will also be watching out for the monsoons and its impact on inflation.  DBS said in a note last week that the Indian Meteorological Department expected an above-normal monsoon in the June-to-September period, the bank added that the rainfall was expected to be well-distributed around the country, particularly over the July-to-August planting-and-sowing peak period. That could bring down inflation and allow the central bank to ease policy further later in the year.



Earlier with RBI cutting rates by 150 bps since, banks have passed on only 70-75 bps by way of a cut in the base rate. Part of the reason for this, of course, is the poor liquidity conditions which RBI promised to fix over a period of time – which is why some experts were expecting the RBI cutting the CRR to infuse more liquidity into the system.


Stellar GDP numbers this fiscal where the Indian economy's first-quarter GDP growth came in at a better-than-expected 7.9 percent waas a moment of cheer, although economists noted that there was underlying weakness in some segments. The surprising element there was agriculture growth which stood at 2.3% compared to minus 1% in the previous quarter. A poor monsoon had led to expectations that the previous year’s Rabi crop would have been affected. A matter of slight concern was the fall in industry growth and the change in trend of services sector growth. Industry has grown at a rate of 7.9% as compared to 8.6% in the previous quarter. The services sector reversed the rising trend of the previous three quarters by posting a growth of 8.7%, down from 9.1% in December quarter.


The  Swamy-Rajan face-off



Last month senior BJP leaders Subramanian Swamy demanded the immediate termination of Raghuram Rajan's tenure as RBI governor in a letter to Prime Minister Modi, "The RBI governor is wilfully and deliberately wrecking the Indian economy, he is mentally not fully Indian, the reason why I recommend this is that I am shocked by the wilful and apparently deliberate attempt by Dr Rajan to wreck the Indian economy," said Swamy.


Read more: Second term? Why Raghuram Rajan is good for India


Things became bad from worst when in a recent interview to a foreign journalist in the US, Rajan said, "I think we have still to get to a place where we feel satisfied. We have this saying - 'In the land of the blind, the one-eyed man is king'. We are a little bit that way." It enraged commerce minister Nirmala Sitharaman, she said, "I would like people like Raghuram Rajan, who know the truths behind the economy and the dynamics of the economy, to be able to speak with better choice of words. Jaitley too was very perturbed by Rajan's remarks, he said, "Compared to the rest of the world, the Indian economy is growing much faster and, in fact, the fastest. At 7.5% growth rate any other country in the world would be celebrating..."


 Final status

Jaitley has now said that the Finance ministry shares a 'warm relationship' with the RBI and that he does not approve of 'personal comments' (like the ones made by Swamy) while Rajan himself has written to policymakers expressing concern about the impact of his reappointment on currency and bond markets, while captains of the Indian industry have firmly and vocally backed him . News reports now suggest that the PMO has granted him an extension.