Tuesday, June 7th, 2016

Inflation surprise prompts Reserve Bank to hold lending rates

Narada Desk | June 7, 2016 12:29 pm Print
"The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain," Rajan said.

Along expected lines, the Reserve Bank of India (RBI) on Tuesday left its key policy rates and reserve ratios unchanged, concerned over the slight rise in inflation and some domestic and global upside risks that have sprung up since April.

The decision was taken at the second bi-monthly policy review for the current fiscal by Reserve Bank of India (RBI) Governor Raghuram Rajan at its headquarters here. “The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” Rajan said.

The central bank also retained India’s gorwth forecast at 7.6 per cent for this fiscal.

Rajan once again called upon commercial banks to transmit its past cuts in policy rates to retail customers. In this regard, he said the government’s reforms on small savings interest rates and the central bank’s own review soon of commercial lending rates should moderate the cost of funds.

In the first bi-monthly policy review on April 5, Rajan had cut by 25 basis points the repurchase rate, or the short-term lending rate for commercial banks on loans taken from the Reserve Bank — to 6.5 per cent from 6.75 per cent.

The reverse repurchase rate for sort-term borrowings was raised to 6 per cent from 5.75 per cent.

Among the two key instruments to check money flow, the cash reserve ratio (CRR), or the quantum of liquid funds which commercial banks have to keep, and the statutory liquidity ratio (SLR), or the value of specified securities which they have to subscribe to, were also left unaltered.

The current CRR is 4 per cent, while the SLR is 21.25 per cent.

In the policy statement, Rajan qualified the upside risks as firming global commodity prices for items like crude oil, the implementation of the 7th Central Pay Commission report, the rise in inflation expectations and overall price scenario.

“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.

“A strong monsoon, continued astute food management and steady expansion in supply capacity, especially in services, could help offset these upward pressures. Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative.”

He also said timely capital for constrained public sector banks will also aid credit flow.

Reacting to the policy update, Marie Diron, Senior Vice President for the Sovereign Risk Group at Moody’s Investors Service, said no significant changes in the monetary policy stance was expected in the near futhre.

“Rather, the transmission of monetary policy will influence India’s economic developments and credit profile,” Diron said, adding: factors that will contribute towards these are clean-up of bank balance sheets, implementation of the bankruptcy law and inflation control.

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