Raghuram Rajan rejects call for cut, leaves rates unchanged; hints at reduction later this year

The key policy rate, repo, was left unchanged at 6.50 percent and the cash reserve ratio at 4 percent, with RBI citing the uncertainties on account of the surge in inflationary pressure and reversal in commodity prices.

Raghuram Rajan rejects call for cut, leaves rates unchanged; hints at reduction later this year

Mumbai: Rejecting calls for a cut, RBI Governor Raghuram Rajan Tuesday kept interest rates intact citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.

Announcing the bi-monthly monetary policy, he also exhorted banks to pass on the benefits of earlier rate cuts and emphasised that a better transmission of policy easing remains critical to support growth.

The key policy rate, repo, was left unchanged at 6.50 percent and the cash reserve ratio at 4 percent, with RBI citing the uncertainties on account of the surge in inflationary pressure and reversal in commodity prices.

While Rajan asserted his monetary policy remains "accommodative", the status quo on rates follows calls from some sections of the ruling BJP, including Rajya Sabha MP Subramanian Swamy, against his continuation at RBI for not making capital cheaper to boost the economy.

However, market experts and economists were mostly expecting RBI to keep rates unchanged and were more interested in any cues about his extension.

On his part, the RBI Governor sought to make light of the speculation saying he would not be "cruel" to "spoil the fun" the media was having with speculation over his extension beyond the current tenure ending September 3.


But, an otherwise outspoken Governor came armed with a "prepared statement" to reply to questions on his tenure, which he read out when asked whether he would be at the helm in September-October period.

Keeping the suspense alive, he also listed out his "unfinished agenda" at RBI including on financial inclusion, cleaning up the books of banks and containing inflation -- a comment seen by some as indication he might want to continue.

While industry continued to hope for a rate cut soon, stock market saw a 232-point rally in the Sensex, which some experts attributed to expectations about Rajan's extension beyond his current tenure ending September 3.

Today's policy, the second bi-monthly policy of the current fiscal, may still be the last statement anchored by RBI Governor, as with the Monetary Policy Committee expected to be in place soon, the next policy could be announced by the committee and not the central bank alone.


The government said RBI's policy statement was in line with the expectations. Economic Affairs Secretary Shaktikanta Das said, "RBI policy statement broadly endorses government expectations on GDP growth and inflation."

Rating agency Moody's said the status quo was broadly in line with market expectations and it would be the transmission of interest rate cuts that would influence India's economic development and credit profile.

Industry leaders and business chambers, however, remained disappointed and said a rate cut would have helped restore the investment cycle at a time when a slump continued in demand.

Experts said a future rate cut would depend on the inflation trajectory, behaviour of monsoon and global factors.

Rajan said RBI has "not shifted stance to either a neutral stance or tightening stance".


"We are still accommodative, that means we are looking for room to ease. If that room opens up we will be able to ease. But now, I can't tell you because there are lots of uncertainties around this. But broadly we are still in easing mode," Rajan told reporters at the customary post-policy briefing.

Explaining the rationale for his caution, Rajan said, "All we are saying is that relative to our April stance, the data prints that came in surprised on the upside. The inflation reading in April was higher than anybody in the markets or we expected.

"Going forward we have to see how inflation pans out. It is a one-month reading. We have to see how the monsoon plays out and how that affects food prices? We also have to look at the supply management by the government. So, a variety of factors will come into play," the Governor said.

He, however, hoped that expectations of a normal monsoon and improved supplies would check any food inflation flare-up.


Retail inflation accelerated to an unexpected 5.39 per cent in April and RBI said part of the spike was fuel driven.

Rajan said the April surprise makes the future trajectory of inflation somewhat more uncertain but retained the March 2017 inflation target at 5 per cent with an upside bias.

When asked whether he is hawkish on inflation again, Rajan said: "I hate these bird analogies -- hawkish, dovish etc. I would just say that it is a realistic assessment of the data that have come in. There are potential disinflationary pressures, there are also potential inflationary pressures."

"The net effect is we have put a little more weight on upside risks to inflation, but we have to wait and see. The target is obviously 5 per cent by March 2017 which is there for us to attain and we have to figure out how to attain it," Rajan said.

Rajan said that the expectations of a normal monsoon and a reasonable spatial and temporal distribution of the rainfalls, along with various supply-side management measures and the launch of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation.


In the first bi-monthly monetary policy statement of the current fiscal in April, RBI had stated that it would remain accommodative but also watch macroeconomic data and financial developments in the months ahead with a view to responding as space opens up.

"Incoming data since then 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," Rajan said.

A strong monsoon as projected by the IMD, continued astute food management as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures, he said.

The Governor said transmission of policy actions into bank lending rates is taking time and shortly a review of marginal cost lending rate framework by the banks will be done.

Rajan said the government and the Reserve Bank are working together for cleaning of the bank balance sheets.

"We are working together with the government on facilitating the process. There are discussions on the mechanisms that will leave projects with appropriate capital structures and access to credit, as well as some incentive for promoters to earn their way out of difficulty," he said, adding that Sebi has also been consulted in the process.

"Let me emphasise this there is no intent to go back to days of forbearance or reverse the move towards transparent bank balance sheets," Rajan said.

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