The Reserve Bank of India on Tuesday kept key policy rates unchanged, in line with expectations, awaiting more signals from the inflation front, Pay Commission proposals and the Centre’s fiscal path. Unveiling the fifth bi-monthly monetary policy review, RBI Governor Raghuram Rajan maintained that the RBI is in “an accommodative stance” and the economy is in a recovery mode. “The RBI will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017,” Rajan said.
“What we have is an economy which is well and truly in recovery, but with areas of weakness. Hopefully, as we go forward, some of the areas of weakness will turn around. We are all working together to ensure that growth takes place, and it is in our collective interest. We need sustainable growth and we will ensure maximum sustainable growth we can get,” he said.
The RBI opted for status quo on rates as retail inflation measured by the consumer price index (CPI) increased for the third successive month in October 2015, pushed up by a surge in the monthly momentum. Food inflation rose sharply in October, driven especially by pulses, he said while addressing a press conference. “While oil prices, barring geo-political shocks, are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months … warrants vigilance,” Rajan said.
As a result, the central bank retained the repo rate — the RBI’s lending rate to banks — at 6.75 per cent after the 50 basis points reduction in its September review. It also kept the cash reserve ratio and statutory liquidity ratio unchanged. Expressing dissatisfaction over rate cut transmission by banks, Rajan said, “Since the rate reduction cycle commenced in January, less than half of the cumulative repo rate reduction of 125 bps has been transmitted by banks. The median base lending rate has declined only by 60 bps.”
On the way forward, Rajan said the RBI will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments.
The RBI also reiterated its projection that the economy will grow 7.4 per cent in the year ending March 2016. The outlook for agriculture is subdued, in view of both rabi and kharif prospects being hit by monsoon vagaries. While there are areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand holds back stronger overall growth, the RBI said.
Similarly, while prospects for a revival in service sector activity have been boosted by optimism on new business, pockets of lacklustre activity such as construction weigh on the overall outlook. “The step-up in public capital spending and the easing stance of monetary policy provide the enabling environment for a revival in private investment demand, supported by easing input prices and improving conditions for doing business,” he said.