RBI governor Raghuram Rajan on Tuesday kept the repo rate unchanged at 6.5% and retained the CRR at 4%.in the central bank’s monetary policy review. “Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action,” Rajan said.
“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain. The expectations of a normal monsoon and a reasonable spatial and temporal distribution of rainfall, along with various supply management measures and the introduction of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation,” the statement said.
“In addition, capacity utilisation indicators suggest that the available headroom in industry could keep output prices subdued even as demand picks up. Nonetheless, there are upside risks – firming international commodity prices, particularly of crude oil; the implementation of the 7th Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel,” Rajan warns.
“Taking these factors into account, the inflation projections given in the April policy statement are retained, though with an upside bias. Considerable uncertainty surrounds these projections, which should be clarified by incoming data in the next few months,” the statement adds.
The monetary policy review comes at a time when Rajan has been criticised by BJP leader Subramanian Swamy for not cutting interest rates in the past. Swamy has even written to PM Modi, requesting the latter to terminate Rajan’s contract as the RBI governor. Whether Modi will give Rajan a second term is anybody’s guess, but Swamy is not alone in expressing displeasure over Rajan’s hawkish stance on rates. India Inc has been clamouring for more rate cuts for some time now.
If the latest GDP data is anything to go by, India’s economy grew at a stellar 7.9% in the last quarter of FY16 and several signs of recovery in the form of better corporate results have added to Rajan’s comfort. Consumer Price Inflation (CPI) on the other hand accelerated to 5.39 per cent in April, bucking the recent slowing trend. Add to that the fact that the Seventh Pay Commission Hike and rising international crude oil prices will further stoke inflationary pressures in the economy.
What about the rest of the financial year? Is there any hope of more rate cuts? “If these two factors (monsoon and agricultural production) come in favourably, then Rajan may be in a position to cut repo rate by 25 basis points in the August’s review. However, even then he would be cautious about cutting key rates in a big way because international oil prices are rising and there is possibility of the US Federal Reserve of hiking rates. A Fed rate hike will put pressure on the exchange rate, so going forward rate cuts are expected to be marginal in nature,” DK Srivastava, Chief Policy Advisor at EY India feels.
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