Raghuram Rajan keeps rates unchanged; to focus on inflation, transmission by bankshttps://indianexpress.com/article/business/banking-and-finance/rbi-repo-rate-raghuram-rajan-latest-updates-interest-rates-policy/

Raghuram Rajan keeps rates unchanged; to focus on inflation, transmission by banks

The Raghuram Rajan-led RBI said rising crude prices and implementation of 7th pay commission pose upside risk to inflation.

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RBI Governor Raghuram Rajan on Tuesday left interest rates unchanged.

The Reserve Bank of India (RBI) on Tuesday kept key policy rates unchanged in the wake of uncertainties on the inflation front but said that it would continue an accommodative policy stance.

Listing reasons for maintaining a status quo, RBI Governor Raghuram Rajan said that incoming data show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices.

However, he hoped that a strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures. “The RBI will monitor macroeconomic and financial developments for any further scope for policy action,” Rajan said while unveiling the second bi-monthly policy statement for 2016-17.

WATCH VIDEO | Breaking Down Raghuram Rajan’s Monetary Policy Statement


Rajan leaves policy rates unchanged: What would decide future policy steps?

The key policy rate — the repo or the rate at which the RBI lends funds to banks, will remain unchanged at 6.50 per cent.

The RBI had cut the repo rate by 25 basis points in April.

On the issue of passing on the benefits of a repo cut to customers, Rajan said: “Transmission of policy into bank lending rates still remains work in progress. We will shortly review the operation of the Marginal Cost Lending Rate (MCLR ) framework to iron out any issues.

Timely capital infusions into constrained public sector banks will also aid credit flow.”

He said more monetary transmission to support the “revival of growth continues to be critical”. “The government’s reform measures on small savings rates combined with the Reserve Bank’s refinements in the liquidity management framework should help the transmission of past policy rate reductions into lending rates of banks. The RBI will shortly review the implementation of the Marginal Cost Lending Rate framework by banks. Timely capital infusions into constrained public sector banks will also aid credit flow,” Rajan said.

WATCH VIDEO | RBI Policy: Raghuram Rajan On Stressed Assets & Transmission Of Interest Rates

According to Rajan, the inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain. On upside risks, Rajan said firming international commodity prices, particularly 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 are to be watched. 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,” he said.


On liquidity, he listed two concerns, mainly on outflows of $20 billion. “First on the maturing of FCNR(B) deposits, our sense is that the leveraged portions of those deposits will not be renewed. Therefore, there could possibly be outflows of the order of $20 billion. The RBI has covered those requirements in the forward markets, and will take some advance deliveries in the lead up to the maturation of the deposits,” he said.

Reassuring the markets, he said, “Some counter parties are apprehensive that they will not be able to deliver easily on the dollars we are owed, and hence there may be some dollar shortage in the market. This is something that we will monitor. We may supply dollars in case of extreme volatility, but no one should take this for granted. We are, however, committed to supply short term rupee liquidity to the extent needed, to support our monetary stance.”