In his last policy decision, RBI governor Rajan keeps rates steady

The Reserve Bank of India Governor Raghuram Rajan delivered no surprises in its last monetary policy meeting while keeping the key policy rate unchanged at 6.50 percent. He had cut repo rate by 25 basis points in April.

Also, the central bank kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities (NDTL) and continued to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.

The monetary policy statement was hawkish with the central bank expressing concern over the recent pickup in CPI inflation. The RBI also cited upside risks to its 5 percent inflation target for FY17, due to firming international commodity prices, particularly oil and the implementation of the seventh pay commission recommendations.

“Changes in rates at this stage would not yield major results due to a muted transmission mechanism owing to poor bank balance sheets and fears of liquidity remaining constrained as FCNR redemptions start. However, the policy adequately addresses this by building confidence that RBI can support any negative impact on liquidity.  By far, a non populist and shielded from lobbyists policy review in a typical Rajan fashion was maintained this time too,” said Debopam Chaudhuri, Chief Economist, ZyFin.

The central bank in its policy statement mentioned that the retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June, with a sharp pick-up in momentum overwhelming favourable base effects. The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year.

Meanwhile, Bloomberg perceives the following key points from the statement:

1. The stance of monetary policy remains accommodative and will continue to emphasize the adequate provision of liquidity

2. Gross Value Added (GVA) projection for year through March kept at 7.6 percent, with risks evenly balanced

3. Authorities to continue intervening in money and currency markets to enable foreign-exchange swap redemptions without market disruption

4. Pro-active liquidity management will help banks transmit more of the previous rate cuts to borrowers

“From October onwards policy reviews would be entrusted upon the newly appointed MPC with equal representation of RBI and Government. This takes away the one man dependence on policy decisions and makes the outcomes more broad based specifically focussed on inflation,” he added.

Lastly, markets will also remain keen to focus on the fourth bi-monthly monetary policy statement, which will be announced on October 4 by the new RBI governor. Investors also await the announcement of the new RBI chief in the ongoing monsoon session of the Parliament.