RBI policy review: Guv Raghuram Rajan maintains status quo on key rate; no moderation in EMIs

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Mumbai | Updated: December 2, 2014 8:59:25 PM

RBI keeps repo rate unchanged at 8.00 pct, says change in monetary policy stance likely early 2015 if inflation eases.

Limp economic growth during PM Narendra Modi's first six months in power has caused unease in government, which added pressure on Raghuram Rajan to ease rates - unsuccessfully though. (PTI)Limp economic growth during PM Narendra Modi’s first six months in power has caused unease in government, which added pressure on Raghuram Rajan to ease rates – unsuccessfully though. (PTI)

Home and auto loans will not become cheaper as the Governor Raghuram Rajan-led Reserve Bank of India (RBI) kept the policy rate unchanged for the fifth time in a row today, but hinted at softening of stance “early next year” if inflation continues to abate and there is an improvement in fiscal health.

The decision to keep the short term lending (repo) rate unchanged at 8 per cent disappointed the industry which said RBI Governor Raghuram Rajan in his fifth bi-monthly policy statement could had been more accommodating to help prop up the sagging economy.

“A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” he said.

Read RBI Governor Raghuram Rajan’s Full Report: Fifth Bi-Monthly Monetary Policy Statement, 2014-15

ANALYSTS’ COMMENTARY: ‘Change in stance by Raghuram Rajan’s RBI very heartening’


The repo rate continues to be at 8 per cent while the cash reserve ratio has also been retained at 4 per cent.

Following the policy announcement, most of the bankers said that there will be no change in lending and deposit rates for now.

United Bank of India Executive Director Deepak Narang said the margins of banks are already under pressure due to high level of non-performing assets (NPAs) or bad loans.

“So, I don’t see a cut in the interest rate at the moment,” he added.

Following the RBI stance, the BSE’s 30-share index Sensex closed at 28,444, down 115.61 points or 0.40 per cent.

On the inflation trajectory, Rajan said he expects it to ease further and average at the 6 per cent.

“Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through,” he said in the bi-monthly review of the monetary policy.

Driven largely by a base-effect, the consumer price inflation for October had come in at 5.52 per cent, the fifth consecutive month that it declined.

Poor showing by agriculture and manufacturing sector pulled down the country’s economic growth rate to 5.3 per cent in the second quarter, as against 5.7 per cent in the April-June quarter of the current financial year.

Under its glide path, the RBI is targeting to get the CPI inflation at 8 per cent as of January 2015 and take it down to 6 per cent by January 2016. While the 2015 target is achievable, Rajan had in the last policy sounded concerned about the “upside risks” to the 2016 target.


Central forecast for retail inflation is revised downward to 6 per cent from 8 per cent for March 2015.

Calls for a rate cut had been growing in the run up to the policy announcement, with Finance Minister Arun Jaitley also pitching for lowering the cost of capital to boost growth.

However, the surprising rebound displayed with a 6.3 per cent growth in the core sector yesterday – indicating an uptick in factory output – had kept everybody guessing about the stance which Rajan adopts.

Additionally, the auto companies also reported an over 10 per cent growth in sales for November, after a dip in the preceding month, indicating a revival in the manufacturing sector. Among the eight core sectors, coal and power have done exceedingly well during the month.

The lobby calling for a rate cut had also been pointing to a continuous decline in global crude prices, which have come to a 5-year low of around USD 68 a barrel, which has the potential to reduce inflation in an oil-importing nation like India.

However, some experts also warn of uncertainty continuing over oil pricing, saying that any geo-political tension will send the prices up again.

India’s RBI leaves rates on hold, says could ease early 2015
(Reuters) The Reserve Bank of India held interest rates steady as widely expected at a policy review on Tuesday, and said it could ease monetary policy early next year provided inflationary pressures do not reappear and the government controls the fiscal deficit.

Uneasy over India’s weak recovery from its slowest phase of growth since the 1980s, the six-month-old government of Prime Minister Narendra Modi had been seen as favouring an early reduction in rates.

The finance ministry said later in a statement it looked forward to the RBI’s support in “the revival of growth and employment” while adding it would work with the RBI on reducing inflationary expectations and reviving investment and growth.

RBI Governor Raghuram Rajan has resisted calls for rate cuts and earlier reiterated his view that containing inflation was a prerequisite for the economy.

“What again and again we have seen in India, and outside India also, is that the way to sustainable growth is to have moderate inflation,” Rajan told a news conference.

Forty-one of 45 economists polled by Reuters had forecast that the RBI would keep the repo rate at 8.00 percent, while four had expected a reduction of 25 basis points.

The RBI’s next policy review is in early February, and most analysts had expected the central bank would either cut interest rates then or wait until April.


“A change in the monetary policy stance at the current juncture is premature,” the RBI said in its statement.

“However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle.”

Rajan told a teleconference with analysts that the central bank wants to be confident that underlying trends for non-food inflation were moving in the right direction before reducing interest rates.

India’s benchmark 10-year bond yield fell 5 basis points on the day to 8.01 percent as investors cheered the central bank’s more dovish stance.

In its statement, the RBI spoke of the need to revive capital investment, and called on the government, which will announce its budget in February, to “stay on course” to meet fiscal deficit targets. Those targets have been jeopardised by  weak tax revenue growth and the slow pace in selling off stakes in state-run companies to raise funds.

Data released on Friday showed economic growth slipped to 5.3 percent year-on-year in the July-September quarter, down from 5.7 percent in the previous quarter. India needs far faster growth to create jobs for all the young people joining its workforce in coming years.

“Things will not pick up just because of rate cuts,” said J. Venkatesan, an equity fund manger for Sundaram Asset Management in Chennai. “A strong reforms push is needed to revive economic growth.”

Helped by tumbling oil prices, India’s annual consumer price inflation (CPI) slowed to 5.52 percent in October, sharply down from a peak of 11.16 percent struck in November last year, but the RBI warned that it expected inflation to rise in December as a favourable base effect wanes.

The RBI has targeted CPI at 6 percent for January 2016, and the central bank said risks to the target “appear evenly balanced under the current policy stance”.

Rajan said if that target was achieved the RBI would then aim for a longer-term inflation target of 4 percent.

While there were few expectations that the RBI would cut interest rates this time, officials had told Reuters last week that Finance Minister Arun Jaitley would press Rajan for a reduction when they held a customary meeting before the policy review – though there was no confirmation that the meeting took place.

The central bank is not statutorily independent from the finance ministry, but it enjoys broad autonomy in setting monetary policy, though there are plans to amend the RBI Act and incorporate a monetary policy committee that gives voting rights to officials both within and outside the central bank.

“In the weeks ahead, the government and RBI will work towards a monetary policy framework that will help institutionalize the gains achieved on the inflation front, so as to reduce inflationary expectations and further support the revival of investment and growth,” the ministry said.




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