Why RBI maintained status quo in today's monetary policy review

There were no expectations of a repo rate cut by analysts and bankers in the Reserve Bank of India's  third bi-monthly monetary policy released on Tuesday, but the government as well as the borrowers were expecting further easing of rates in the economy. Raghuram Rajan has, however, based its 'status quo'  stance on the following four factors:  

• Sticky protein-rich food items: For some food items especially protein-rich items, pulses  and oilseeds, prices have risen sharply in recent months. These items tends to be  sticky and contribute to an upward bias to inflation and inflation expectations. The share of food items in the CPI is almost 45 per cent. 
• Service tax increase yet to show up: In the Union Budget 2015-16, Finance Minister Arun Jaitley increased the service tax from 12.36 per cent to 14 per cent. This has a direct impact on food, flat, insurance and mobiles. Rajan believes the full effects of the service tax increase, which took effect from June this year, will feed through  over the rest of the year.
• The crucial September CPI Numbers: The latest CPI data of June reflects a rise to 5.4 per cent as compared to 5.01 per cent in May this year. CPI  is, however, below the RBI-targeted 6 per cent level by January 2016.  Overall, the CPI has been much lower than the 10 per cent earlier.  There is also a base effect contribution to lower numbers. Rajan expects large base effects to pull down headline inflation in July  and August numbers. From September, favorable base effects wane. So September will be a crucial month to watch out for.
• Slow monetary transmission: The banks have so far transmitted only 30 basis points to  borrowers  as against 75  basis points cut in the repo rate by RBI since January this year. Rajan awaits a greater transmission  of its earlier front-loaded past actions of reducing repo rate from a high of 8 per cent to 7.25 per cent.