Rajan keeps key rates unchanged, warns of higher inflation

The Dollar Business Bureau

The Reserve Bank Governor Raghuram G Rajan has maintained status quo by holding the key rates in the third bi-monthly monetary policy statement for FY 2016-17. The RBI has retained repo rate under the liquidity adjustment facility (LAF) at 6.5%, cash reserve ratio (CRR) of scheduled banks at 4%, reverse repo rate under the LAF at 6%, marginal standing facility (MSF) rate and the Bank Rate at 7% each.

The more-than-anticipated upsurge in food prices has increased the trajectory of retail inflation to 22-month high in June. Prices of pulses and cereals are increasing continuously. The inflation, excluding food and fuel, is likely to grow. Under these inflation risks, it is appropriate to keep the repo rate unchanged. Easy liquidity conditions are prompting the banks to transmit previous policy rate cuts, Rajan said in a statement released on Tuesday.

But industry experts have mixed reactions with regard to RBI’s policy stance. According to CRISIL, loose monetary policies may continue for a longer period in advanced economies. To support the British economy from the aftershocks of Brexit, the Bank of England cut its benchmark interest rates to record lows. Japan also started a large fiscal stimulus programme. Chances of a rate hike by the US Fed also appears slim at this juncture.

“For India, we expect the GDP growth to rise to 7.9% in 2016-17, assuming a normal monsoon. In comparison, the RBI's growth forecast for the current fiscal is 7.6% and its inflation target is 5% for March 2017. So, we expect another 25 basis points cut this fiscal, which could come as early as October,” CRISIL said in a statement.

FICCI President Harshavardhan Neotia said that the country’s economic situation is slowly improving and a policy rate cut would have translated into more investments. The process of transmission of earlier rate cuts by banks has remained slow. FICCI hopes the RBI would continue to work on improving the pass through of the earlier rate cuts, he said.

Expressing disappointment, Knight Frank India CMD Shishir Baijal said that the last few months have been good for the real estate sector with the passage of the Real Estate Regulation and Development (RERA) and the Goods & Services Tax (GST) Bills. At this time, a policy rate cut would have given a further push to the sector.

On a positive note, ICICI Bank MD and CEO Chanda Kochhar said that the decision to keep the policy rate unchanged is already expected. The RBI ensured easy liquidity conditions that are indeed commendable. A good monsoon and the policy reforms such as the GST would augur well for the country’s economy in future.