Strongly rebuffing pressure from the BJP Led NDA Prime Minister Narendra Modi government to reduce cost of borrowing, RBI Governor Raghuram Rajan has gone ahead and has kept interest rates unchanged, citing a spike in food prices and banks passing on to consumers only less than half of its previous rate cuts.
Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent. The Reserve Bank of India (RBI) has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent,since January, when it embarked on an easing cycle.
The banks, however, have passed on only 0.3 per cent to borrowers, Rajan said. “Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” he added.
The central bank, he said, will look for more room to ease policy rate depending upon fuller transmission of rate cuts bybanks, food prices and US Federal Reserve normalisation signs. A top finance ministry official had yesterday pitched for the fourth interest rate cut this year, saying inflation can not be the sole driving factor in deciding on monetary policy action.
Keeping rates unchanged was driven by RBI not wanting to risk inflation from surging, a poor monsoon and a possible
increase in interest rates in the US next month. RBI said sustained hardening of inflation, excluding food and fuel, is “most worrisome”.
“Significant uncertainty will be resolved in the coming months, including likely persistence of recent inflationary pressures, full monsoon out-turn, as well as possible Federal Reserve actions,” he added.
Inflation projections for January to March 2016 are lower by about 0.2 per cent, he said.Retaining economy growth forecast at 7.6 per cent for 2015-16, RBI said outlook was improving gradually.
Rajan also said that RBI will announce at least one set of bank licences before end of August.