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RBI Monetary Policy: Raghuram Rajan leaves rates unchanged; warns of inflation risks

Citing upside risks to the Reserve Bank's inflation target for March 2017, Governor Raghuram Rajan on Tuesday maintained status quo on key rates at his last policy review meeting, as was widely expected, but underlined that the central bank continues to be accommodative.


RBI Monetary Policy: Raghuram Rajan leaves rates unchanged; warns of inflation risks

Mumbai: Citing upside risks to the Reserve Bank's inflation target for March 2017, Governor Raghuram Rajan on Tuesday maintained status quo on key rates at his last policy review meeting, as was widely expected, but underlined that the central bank continues to be accommodative.

"It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. The stance of monetary policy remains accommodative and will continue to emphasize the adequate provision of liquidity," he said in the third bi-monthly review of the monetary policy for the current fiscal.

 

Accordingly, the overnight repo rate at which RBI lends to the system has been retained at 6.5 per cent, while the reverse repo rate which is paid to banks has been maintained at 6 per cent. The Cash Reserve Ratio will be at 4 per cent.

Rajan said risks to the March 2017 target of 5 per cent for headline inflation --- which climbed to a 22-month high of 5.8 per cent in June --- "continue to be on upside" on factors like food inflation, services and the effect of the seventh pay panel implementation to government employees.

The strong sowing and the positive progress of the monsoon augurs well for the food inflation, RBI said, adding that prices of pulses and cereals are rising.

 

On growth, RBI maintained its projection of 7.6 per cent on a gross value addition basis, saying the favourable monsoon which is 3 per cent above the average which raises agricultural growth and rural demand and higher consumption on the back of the 7th Pay Commission implementation will be aiding it.

Rajan, who will return to academia after his current three-year at RBI tenure ends on September 4, had started-off his stint here with a couple of rate hikes, which earned him blame from certain quarters as an inflation hawk.

Signing of the inflation targeting framework between the RBI and the Government based on the recommendations of a committee headed by his Deputy Governor Urjit Patel only cemented the reputation.

 

With the Monetary Policy Committee framework on the anvil, wherein shaping of the policy will shift to the panel, this might also be the last of the Governor-led policy announcements at Mint Street.

RBI today welcomed the passage of the Constitutional amendments for transition to the Goods and Services Tax saying it "augurs well for the growing political consensus for economic reforms."

RBI said the timely implementation of GST which has to kick-in by April 2017 will be "challenging" but the indirect tax reform will be strengthening government finances over the medium-term, boost business sentiment and eventually investments.

"The current accommodative stance of monetary policy and comfortable liquidity conditions should also provide a congenial environment for the reinvigoration of aggregate demand conditions," it said.

Rajan said the successive downgrades in the global growth projections by multilateral agencies and world trade sluggishness is pointing to a further slackening in the external demand going forward.

On inflation, he reiterated that RBI will look through the statistical effect of house rent allowance increase because of the Seventh Pay Panel implementation, but its impact on inflation expectations will have to be "carefully monitored".

Inflation rose to 5.8 per cent in June and is widely expected to rise further in July before cooling-off once the food prices climb down on the good monsoons. Inflation measured by wholesale prices rose for the fifth consecutive month to 1.68 per cent for June.

The RBI, which has now become an 'inflation-targeting' central bank, wants to get the headline inflation number down to 5 per cent by March 2017.

The liquidity is comfortable in the system, following the moves announced by Rajan at the first bi-monthly monetary policy in review on this front.

Rajan today said RBI has been front-loading liquidity provision through its open market operations and spot interventions or deliveries of forward purchases, in wake of the expected pressure in the FCNR (B) redemptions expected in September.

He added that the RBI will continue to work to ensure that there are no market disruptions because of the redemptions through domestic liquidity operations and forex interventions.

The factory output has been showing signs of weakness, but the pressure on inflation front made expectations of a growth-propping rate cut difficult.

Interestingly, Rajan has reiterated the "accommodative" monetary policy stance every time he maintained status quo on rates after January 2015, when he announced the first of the four rate cuts totalling 125 basis points.

 

From Zee News

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