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RBI maintains status quo on key rates, links further cuts to inflation

The Reserve Bank of India (RBI) held its key repo lending rate over increasing consumer inflation and fears of US rate hike, with governor Raghuram Rajan saying he is open to “accomodation” on future economic data.

business Updated: Dec 01, 2015 16:28 IST
HT Correspondent
HT Correspondent
Hindustan Times
RBI,Reserve Bank of India,Repo rate
The Reserve Bank of India has kept key lending rates unchanged. (Reuters Photo)

The country’s central bank kept its key lending rates unchanged on Tuesday over increasing consumer inflation and fears of a US rate hike as RBI governor Raghuram Rajan said previous deep cuts hadn’t been fully transmitted to the public.

The announcement came a day after figures showed India’s economy accelerated its growth at 7.4 % in the July-September quarter, outpacing China, but Rajan said weak rural and global demand was holding back economic growth in Asia’s third-largest economy, highlighting sectors such as construction.

The Reserve Bank of India kept the repo rate at which it lends to commercial banks at 6.75% while the cash reserve ratio (CRR) -- the amount of funds banks have to keep with the central bank -- was retained at 4.4%.

A lower repo rate brings down banks’ borrowing costs, which in turn, allows them to slash their “base rates”, the floor interest rate on which lending rates for final home, auto and corporate borrowers are fixed.

Rajan announced an ambitious plan to achieve a consumer inflation target of 5% by March 2017 amid signs of an industrial revival with growth in the manufacturing sector picking up.

He also said the RBI would shortly announce a methodology for determining the base rate -- the minimum benchmark rate below which a bank cannot lend --a move aimed at ensuring that banks pass on policy rate cuts to borrowers.

“The Reserve Bank 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% by March 2017,” Rajan said in his statement.

Consumer inflation in India cooled to record lows earlier this year but crept back to a four-month high of 5% in October on the back of a supply deficiency in pulses. The RBI has also been cautious ahead of an expected rate increase – the first in a decade -- by the US Federal Reserve, which meets in mid-December.

The rate hold was widely expected as the bank had already shaved 1.25 percentage points off borrowing rates this year, bringing the repo rate to its lowest level in four years. But it is still higher than that in other major economies, with the United States and Japan at record lows of near zero percent.

Rajan surprised analysts in the previous monetary policy review in September, aggressively slashing rates by 0.5 percentage point, citing comfortable ease in inflation.

But the RBI chief complained that the reductions hadn’t been passed on by the banks to the public, saying lending rates had only fallen by a median of 60 basis points (a hundredth of a percentage point).

“There’s room building up for banks to transmit more. It’s a matter of time,” Rajan said in a news conference in Mumbai.

Since he took charge of the RBI in 2013, Rajan has made controlling inflation a priority and has often faced off with senior ministers, who urge him to cut rates in a bid to boost job creation, a key poll promise of the BJP.

India has cemented its position as the world’s fastest-growing major economy but analysts say a prolonged slowdown in infrastructure and a drought-hit farm sector could potentially hurt the broader economy’s growth.

The growth in eight “core” infrastructure sectors -- coal, crude oil, natural gas, refineries, fertilisers, steel, cement and electricity – have slowed down while the growth in the construction sector is still sluggish.

The government is hoping higher salaries from employees from next year – as recommended by the pay panel -- will trigger a spending spree and help the economy gather pace.

First Published: Dec 01, 2015 11:32 IST