RBI Policy Day: Rajan says no repo or CRR cut

Reserve Bank of India (RBI) has decided to keep key rates unchanged and maintained status quo. 

In its first bi-monthly monetary policy statement, RBI said that on the basis of an asasessment of the current and evolving macroeconomic situation, it has been decided to keep repo and Cash Reserve Ratio (CRR) unchanged at 7.5% and 4.0%, respectively. It said, "Consequently, the reverse repo rate under the LAF will remain unchanged at 6.5%, and the marginal standing facility (MSF) rate and the Bank Rate at 8.5%." 

The rationale RBI provided for the policy stance, is that inflation path has evolved along the projected path after a sizable undershoot of the January 2015 target. 'CPI inflation is projected at its current levels in the first quarter of 2015-16, moderating thereafter to around 4% by August but firming up to reach 5.8% by the end of the year, adding, "There are upside risks to the central projection emanating from possible intensification of el niño conditions leading to a less than normal monsoon; large deviations in vegetable and fruit prices from their regular seasonal patterns, given unseasonal rains; larger than anticipated administered price revisions; faster closing of the output gap; geo-political developments leading to hardening of global commodity prices; and spillover from external developments through exchange rate and asset price channels. However, at this juncture, these upside risks appear to be offset by 4 downsides originating from global deflationary/disinflationary tendencies, the still soft outlook on global commodity prices; and slack in the domestic economy."

India Inc has been asking for the third rate cut this year in order to boost economic activity in the country. Their argument has been that it is important for banks to bring down lending rates if Corporate India  has to borrow again to invest in expanding capacities. 

Defending its decision, RBI said, "Mixed signals are coming from the service sector. While the national accounts statistics seem to suggest that consumption demand for services is robust relative to the demand for goods, and purchasing managers perceive activity expanding on new orders, various coincident indicators of services sector activity including railway and port traffic, domestic and international passenger traffic, international freight traffic, tourist arrivals, motorcycle and tractor sales as well as bank credit and deposit growth remain subdued." 

On inflation, RBI said that inflation excluding food and fuel fell successively in the nine months till February. A large part of this disinflation has been on account of the slump in international crude oil prices feeding through into domestic prices of petrol and diesel that are included under the category transport and communication.

It added, "Retail inflation measured by the year-on-year changes in the revised consumer price index (CPI) firmed up for the third successive month in February as favourable base effects dissipated, despite the price index remaining virtually flat since December. The still elevated levels of prices of protein-rich items such as pulses, meat, fish and milk kept food inflation from following the seasonal decline in prices of vegetables and fruits."

RBI has already surprised the markets twice by cutting repo rate out of turn and bringing down Statutory Liquidity Ratio (SLR) once when the January repo rate cut didn't work. 

Banks, however, lament that their cost of funds is too high at the moment and lending rates will not follow RBI's diktat unless deposit rates come down. 

"Industry always wants rate cut. Low interest rate will bring down cost of fund for the industry," Bajaj Group Chairman Rahul Bajaj told reporters on the sidelines of CII event here.

Echoing similar views, Adi Godrej, Chairman of the Godrej Group, said: "Rate cut by RBI is very much required. It will help in boosting economic activities."

Also Read: Is Rajan administering the wrong pill to bring down lending rates? 

SBI chairperson Arundhati Bhattacharya had said that RBI should bring down CRR instead of repo rate. She said that cutting CRR would bring down cost of funds and the benefit will reach borrowers. 

The credit offtake in India has been low and fell  below 10% in February. 

Also Read: Credit growth slows to 9.4% in February

It said, "Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review."

(With agencies)