RBI holds rates on accelerated GDP, inflation concerns

The Reserve Bank of India (RBI) kept the interest rates unchanged at 6.75 per cent in its fifth bi-monthly monetary policy review meet on Tuesday. The central bank's decision to hold rates comes in the backdrop of accelerated second quarter GDP data of 7.4 per cent released on Monday and concerns over rising inflation.

"We are still accomodative, but vigilant on inflation. See uptick in inflation till December," RBI Governor Raghuram Rajan said in a press conference after the policy meet on Tuesday.

While the wholesale price index is  on a negative zone, the consumer price index, tracked by RBI for cutting rates, has started moving up. CPI has climbed up to 5 per cent as against the 6 per cent targeted by RBI by January 2016. In fact, RBI itself has projected the inflation rate at 5.8 per cent by January next year.

RBI, which is set to achieve its target of getting inflation down at 6 per cent by January and is aiming to reduce the number further to 5 per cent by March 2017, will monitor developments on the commodity prices, including food and oil and external developments in its future policy formulations, Rajan said.

With no change in the rates, repo rate stands at 6.75 per cent while cash reserve ratio (CRR) is at 4 per cent.

Rajan had earlier said that banks are still to pass down the benefits of the rate cut. "Focussing on transmission, have barely seen half the rate cuts since January," Rajan said.

Two months ago, Rajan surprised the market with a 50 basis points cut in the repo rate, the rate at which it lends to banks. The cumulative interest cuts is about 125 basis points since January this year.

Though the central bank's decision to hold rates seemed backed by the concerns of a rate hike by US Federal Reserve in mid-December, Rajan said, "US Fed is not the central factor in our deliberations going forward."

Though the RBI Governor noted that second-quarter GDP numbers indicate early signs of recovery, he chose to stick to the earlier projection of 7.4 per cent for the fiscal with a marginal downward bias.

He added that during normal times the central bank would stick to policy dates for rate action, adding, "when times are warranted, we are prepared to move off-cycle."

Rajan said that the RBI will be putting out a new methodology for base rate within this week.

Speaking about the government achieving 74 per cent of its fiscal deficit target in the April-October period, Rajan said that he hoped the government would improve the quality of fiscal deficit in budget as quantum and quality both matter.

With the seventh pay panel s recommendations of a 23.55 per cent hike in salaries leading to concerns on the impact on inflation in future, RBI said the government will have to do "appropriate budgetary tightening" to reduce the impact and it will be watching the space.

"...its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the government stays on the fiscal consolidation path," Rajan said.

The recommendations will cost the exchequer 0.65 per cent of GDP or Rs 1.02 trillion (Rs 1.02 lakh crore) per annum is also another factor which the central bank will be keeping an eye on.

The Governor expressed hope that the clean-up of bank balance-sheets by way of containing bad loans will make more funds available for productive sectors.