The Reserve Bank of India Tuesday maintained its status quo, largely in line with market expectations, after having cut repo rate at the April policy meet.
Governor Raghuram Rajan kept rates on hold Tuesday at 6.5 percent in the apex bank’s bi-monthly monetary policy review. The central bank had last cut the repo rate by 25 basis points from 6.75 percent to 6.50 percent in the first bi-monthly monetary policy review on April 5.
He said that higher upside risks to 'inflation trajectory' posit for keeping the rates unchanged, but said the central bank will remain accommodative provided data are supportive.
The RBI’s decision came in against a backdrop of higher retail inflation in April, a likelihood of the Fed to raise interest rates later this month and required clarity on the timely outburst of monsoon.
Retail inflation, measured by the consumer price index (CPI), jumped to 5.39 percent in April 2016, against 4.83 percent in the previous month. For the RBI, CPI is the nominal anchor for making monetary policy.
Moreover, recent news claiming the throws by the newly nominated BJP Rajya Sabha Member of Parliament, Subramanian Swamy on Governor Rajan may have also throttled the RBI to act in this regard, having blamed for the collapse of the industry and rise of unemployment in the economy.
According to the central bank, incoming data since the first bi-monthly monetary policy review in April 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, reports said.
Meanwhile, the RBI also maintained that there are upside risks to the economy as well, mentioning the firmer global commodity prices, especially crude oil. Moreover, the implementation of the 7th Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges, the upturn in inflation expectations of households and of corporates and the stickiness in inflation excluding food and fuel, all pose risks to the Indian economy.
“A strong monsoon, continued astute food management, as well as 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,” Reserve Bank of India bi-monthly policy meeting panel said in their statement.
Dr. Raghuram Rajan’s three-year tenure as the RBI Governor is set to end in September and doubts remain whether he would be granted an extension by the Narendra Modi-led government. However, inconsistency prevails over whether he would accept an extension, even.
The material has been provided by InstaForex Company – www.instaforex.com