Zee Media Bureau
New Delhi: The Reserve Bank of India (RBI) kept its interest rates unchanged at its third bi-monthly monetary policy review on Tuesday.
After the status-quo in policy rates, the reserve ratio stands at 7.25 percent, the reverse ratio stands at 6.25 percent and cash reserve ratio (CRR) and statutory liquidity ratio (SLR) at 4 percent and 21.5 percent, respectively.
While retail inflation in June rose to an eight-month high of 5.4 percent, the overall wholesale price index (WPI) based inflation was (-)2.4 percent in the same month.
RBI mostly tracks the consumer price inflation for its monetary policy decision.
In its last review on June 2, RBI cut repo rate 0.25 percent for the third time this year.
During the calender year, RBI has reduced the rate thrice by 0.75 percent. It was cut by 0.25 percent each in January, March and June.
with Agency Inputs
On the controversial issue of curtailing the veto power of RBI Governor to set interest rates, Rajan said it would be better for the monetary policy committee (MPC) to decide benchmark rates rather than one individual.
He added that while the details of the monetary policy committee would have to be ironed out, "there are no differences between the RBI and government" in this matter.
The revised draft of Indian Financial Code (IFC), as released by Finance Ministry last month, had suggested doing away with this veto power and wants the seven-member MPC to take decisions by a majority vote.
Of the seven members of the MPC, four would be government nominees and rest from the RBI.
Referring to the resistance shown by banks to pass on policy rate cuts to borrowers, Rajan said banks have only cut 0.30 percent at the median level as against RBI's cut of 0.75 percent this year.
He hoped that with a likely pick-up in loan demand from the third quarter, "banks will see more gains from cutting rates to secure new lending and transmission will take place".
Welcoming the government's move to infuse more capital into state-run banks, Rajan said it will help both loan growth as well as transmission as the liquidity conditions ease.
On retail inflation, he said the June reading of 5.40 percent resulted in the projections being elevated, but exuded confidence of meeting the 6 percent target for early 2016.
However, he said "most worrisome" factor is the hardening in the non-food and fuel inflation, adding that the impact of the hike in service tax rates to 14 percent, effected in June, will flow into the inflation reading through the year.
As regards growth, Rajan said the outlook is improving gradually and maintained the projection at 7.6 percent for financial year 2015-16.
He, however, warned that the contraction in exports "could become a prolonged drag" on growth going forward.
The global economic activity has recovered "modestly" in the June quarter but recessionary conditions in Russia and Brazil with downside risks from commodity prices and geopolitical conditions do cast a shadow on the outlook, Rajan added.
Consumer price inflation accelerated to 5.4 percent in June from 5.01 percent in the preceding month on rising food prices. The acceleration in inflation came despite a favourable base effect.
Under a target declared as part of a newly announced inflation-targeting framework, RBI is targeting to hold the inflation under 6 percent by January next year, which many analysts feel is possible.
However, after this, the central bank's aim is to compress it down further to 4 percent in two years.
Recently, there have been some supporting factors like better-than-expected rainfall, wider acreage of sown crop and softness in global commodity prices following the Iran nuclear deal which may take off the pressure on inflation.
Those making a case for rate cuts were hoping that these factors, along with the sluggish economic growth, will prevail upon the central bank to ease the rates further.
The factory output growth slowed down to 2.7 percent in May from 3.4 percent in the previous month.
As expected, India Inc expressed disappointment on RBI's decision to maintain status quo saying that a rate cut at this juncture would have helped the industry is dealing with stressed assets.
"India Inc is surely disappointed with RBI not announcing any cut in the policy interest rates, which have become one of the biggest drags on their balance sheets", said Assocham president Rana Kapoor, adding, "unfortunately, it is a missed opportunity again!"
RBI, he said, should have taken full advantage of cheap commodity prices, including of fuel, and go for some bold moves in interest rates to revive consumer demand and help corporates de-leverage balance sheets.
CII Director General Chandrajit Banerjee said RBI should have continued the policy of front-loading interest rate cuts to give a strong signal that the central bank is aggressively addressing the growth risks in the economy accruing from weak demand conditions.
"RBI's decision to maintain the status quo on policy rates indicates a guarded approach towards monetary easing to restrain inflationary expectations...", he said.
Going forward, he hoped "RBI would resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the inflation trajectory, the normalcy of monsoons and possible Federal Reserve actions."
