Raghuram Rajan holds rates, lobs ball to government

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Mumbai | Published: February 3, 2016 1:46:54 AM

The Reserve Bank of India (RBI) left the key repo rate unchanged at 6.75% on Tuesday with the central bank saying it continues to be accommodative.

rbi, rbi monetary policy, rbi monetary policy review, rbi monetary policy news, rbi monetary policy raghuram rajan, rbi policy review, rbi policy review news, rate cuts, start-ups, Union Budget 2016-17The central bank lowered its growth projection for FY17 to 7.6%, noting private sector investment could stay subdued as balance sheets remain highly leveraged. (Express Photo)

The Reserve Bank of India (RBI) left the key repo rate unchanged at 6.75% on Tuesday with the central bank saying it continues to be accommodative. Governor Raghuram Rajan put the onus for further monetary policy easing on the government saying structural reforms that boosted the economy while controlling spending would “create more space for monetary policy to support growth”.

The governor asserted at the post-policy press conference that it would be unfair to read the RBI’s stance as having become hawkish over time. “Broadly speaking, the positives are balanced by the negatives,” he said.

Economists believe there is a chance of a rate cut in April. “We continue to believe that the easing space of 25bps could open up, possibly right after the budget announcement, if government reinforces reforms agenda and its fiscal consolidation roadmap,” said Citigroup economist Samiran Chakraborty.

“The central bank’s reiteration of its ‘accommodative stance’ today supports our call for a 25bp rate cut in April, though it still depends on the upcoming budget,” HSBC economist Pranjul Bhandari wrote in a note.

The central bank lowered its growth projection for FY17 to 7.6%, noting private sector investment could stay subdued as balance sheets remain highly leveraged. The RBI noted concerns relating to stalled projects had resurfaced as had those on surplus capacity and weak global conditions that could continue to further hurt exports.

State Bank of India chairman Arundhati Bhattacharya observed liquidity remained a concern with systemic liquidity deficit well in excess of the prescribed 1% net demand and time liabilities or NDTL currently. “With the revised liquidity coverage ratio kicking in and deposit growth lagging, the RBI may have to be proactive in managing the liquidity deficit through tools available at its disposal,” Bhattacharya added.

Later in the day, the RBI announced a premature buyback of gilts — using the government’s cash surplus — which is expected to infuse Rs 20,000 crore of liquidity.

The central bank left the projection for inflation untouched at 5 % by the end of 2016-17, cautioning that while goods inflation declined, services inflation had been sticky since September 2015 across housing, transport and communication, medical and other services. The impact of the pay revision recommended by the Seventh Pay Commission had not been factored into the projections, and would impact inflation, for a couple of years the central bank noted.

“We have to see how it is implemented and who implements it including the Centre and the state and the timings. There are some aspects of the pay commission that we can look through, some we cannot,” Rajan said.

The central bank continues to maintain the repo rate — the rate at which the RBI lends overnight money to banks — at 6.75% and the cash reserve ratio at 4%. The reverse repo rate continues to be at 5.75% while the marginal standing facility rate and the bank rate stand at 7.75%. In calendar year 2015, the RBI reduced the repo rate by 125 basis points with the last rate cut happening in September at 50 basis points.

 

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