RBI keeps key rates unchanged; eyes Union Budget 2016-17 for further easing

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Updated: February 2, 2016 11:04:26 PM

RBI monetary policy review: Raghuram Rajan also said that the central bank has not factored in 7th pay panel recommendation in inflation target.

rbi monetary policy RBI monetary policy review: Raghuram Rajan also said that the central bank has not factored in 7th pay panel recommendation in inflation target. (Photo: Reuters)

In line with expectations, the Reserve Bank of India (RBI) on Tuesday maintained status quo on key interest rates in its sixth bi-monthly monetary policy review.

Rajan kept the repo or short term lending rate remains unchanged at 6.75 per cent and the reverse repo rate at 7.75 per cent.

However, he hinted at accommodative stance saying with inflation moving closer to the target there would be more room for rate cut to support growth.

The central bank will now eye the government’s annual budget statement at the end February to decide on whether to cut interest rates further. The government is slated to deliver its 2016/17 budget on Feb 29.

“Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17,” Rajan said announcing the 6th and final monetary policy for the current fiscal.

The RBI had slashed the policy repo rate by 125 basis points in 2015. Rajan had warned on Friday against straying from the path of fiscal consolidation or relaxing the fight against inflation.

Keeping rates on hold at the last policy review in December, the RBI had reiterated that it remained on an “accommodative” path that will help give more momentum to economic growth.

Rajan also said that the central bank has not factored in 7th pay panel recommendation in inflation target. “How the government implements a planned 24 per cent pay hike in salaries and pensions for some 10 million current and former government employees will also be key in determining the path of inflation,” he said.

“Inflation has evolved closely along the trajectory set by the monetary policy stance. With unfavourable base effects on the ebb and benign prices of fruits and vegetables and crude oil, the January 2016 target of 6 per cent should be met,” Rajan added.

The RBI Governor said the Indian economy is being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude.

This needs to be maintained so that the foundations of a stable and sustainable growth are strengthened, he said.
On the GDP, RBI maintained its growth forecast at 7.4 per cent with a downside bias.

Below are the highlights from Raghuram Rajan’s speech on monetary policy review

-Keeps repo rate unchanged at 6.75 per cent
– Keeps CRR unchanged at 4 per cent
– Expects inflation to be around 5 per cent by March 2017
– Expects GDP growth of 7.6 per cent for FY17, 7.4 per cent with downward bias for FY16
– Indian economy lost momentum in Q3
– Have not factored in 7th pay panel recommendation in inflation target
– Continue to remain accommodative even if rates remain unchange
– Working with banks and government to ensure identification of stressed assets
– Bearish commodity price dynamics are also likely to impact investor sentiment
– Marginal standing facility rate and Bank Rate at 7.75 pc
– RBI to create a special ecosystem for startup funding
– Prospects for the rabi harvest are improving slowly;
– First bi-monthly monetary policy for 2016-17 on April 5.

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