The Reserve Bank of India on Tuesday made no changes to key interest rates citing inflationary trends for maintaining the repo rate at 6.5%.
The RBI made this announcement at the third bi-monthly monetary policy which is also Raghuram Rajan’s last policy as governor. The repo rate is the rate at which the RBI lends to banks. It is the benchmark on which banks fix their lending rates; a lowering or rise in the repo rates makes loans cheaper or costlier, respectively.
“The recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year. Moreover, prices of pulses and cereals are rising and services inflation remains somewhat sticky,” RBI governor Rajan said explaining the move to maintain the interest rates. Giving projections of inflation, the governor said it depends on how crude prices trend. “Going forward, the strong improvement in sowing on the back of the monsoon’s steady progress, along with supply management measures, augers well for the food inflation outlook. If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation.”
The credit policy also kept unchanged the cash reserve ratio of scheduled banks at 4%.
It was widely expected that the RBI would hold on to the interest rates as inflation currently is at a 22-month high of 5.77%, closer to the upper tolerance limit of the fixed target of 4% for the next 5 years. The government had recently accepted the RBI’s target of 4% inflation for the next five years.
On GST, RBI said that while timely implementation of GST “will be challenging, there is no doubt that it should raise returns to investment across much of the economy, even while strengthening government finances over the medium term. This should boost business sentiment and eventually investment.”
The RBI had a cautious stance on world trade and its impact on India’s growth projections. “…successive downgrades of global growth projections by multilateral agencies and the continuing sluggishness in world trade points to further slackening of external demand going forward. Accordingly, the growth projection for 2016-17 is retained at 7.6%, with risks facing the economy at this juncture evenly balanced around it.”