Why RBI Governor Raghuram Rajan didn’t go for a rate cut this time

By: | Updated: August 4, 2015 3:44 PM

The Reserve Bank of India its monetary policy announcement on Tuesday said that it is keeping the policy rate unchanged at 7.25 per cent and the cash reserve ratio unchanged at 4 per cent.

reserve bank of indiaThe Reserve Bank of India its monetary policy announcement on Tuesday said that it is keeping the policy rate unchanged at 7.25 per cent and the cash reserve ratio unchanged at 4 per cent. (PTI)

The Reserve Bank of India its monetary policy announcement on Tuesday said that it is keeping the policy rate unchanged at 7.25 per cent and the cash reserve ratio unchanged at 4 per cent.

The Reserve Bank of India (RBI) also said government economic reforms and the timing of any increase in US interest rates would be key factors that will determine whether the central bank cuts rates for a fourth time this year.

We look at the reasons why RBI Governor Raghuram Rajan didn’t go for a rate cut this time.

-Reserve Bank of India kept its policy rates unchanged, saying headline inflation is at elevated levels and banks are yet to pass on the full benefits of previous rate cuts. Speaking about the current situation with regard to growth and inflation, among other issues, RBI Governor Raghuram Rajan said: “Taking into account all this, and given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy.” The RBI maintained its consumer inflation target of 6 per cent for January 2016, saying risks to that goal were “broadly balanced”. The central bank also highlighted “a sustained hardening” of inflation outside of food and fuel as “most worrisome.” The RBI had this year set a broad target of 2 to 6 per cent for consumer inflation.

– Banks passing on to consumers only less than half of its previous rate cuts: To the central bank’s chagrin, the benefits for the broader economy have been limited because of commercial banks’ reluctance to lower their lending rates. The Reserve Bank of India (RBI) has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent, since January, when it embarked on an easing cycle. The banks, however, have passed on only 0.3 per cent to borrowers.

– Keeping rates unchanged was driven by RBI not wanting to risk inflation from surging, a poor monsoon and a possible increase in interest rates in the US next month. “Significant uncertainty will be resolved in the coming months, including likely persistence of recent inflationary pressures, full monsoon out-turn, as well as possible Federal Reserve actions,” Rajan said.

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