RBI holds interest rates; turns bullish on growth

Shiv Kumar

Tribune News Service

Mumbai, August 4

The RBI today left benchmark rates unchanged even as it turned bullish on the revival of the economy.

The central bank said it was leaving the repo rate and the cash reserve ratio (CRR) unchanged at 7.25% and 4%, respectively. In its post-policy review commentary, RBI Governor Raghuram Rajan said a gradual uptick in the economy’s growth was evident.

The RBI also reduced consumer inflation forecast for January-March 2016 by 0.2% on account of lower crude prices and better-than-expected monsoon.

“It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” the central bank said. “Short term real risk free rates are nevertheless supportive of borrowing by interest rate sensitive consumer segments such as housing and automobiles.

Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions,” it added.

The central bank noted that prospects for India’s economic growth had improved. “Favourable real income effects could accrue from weaker commodity prices, in particular crude oil and a possible step-up in agricultural activity if monsoon conditions continue to improve,” it said.

It went on to warn that investments in the Indian economy still needed to pick up. “Notwithstanding some improvement in the state of stalled projects, supply constraints continue to be binding and new investment demand emanating from the private sector and the Central Government remains subdued,” the RBI said.

In a conciliatory move, RBI Governor today seemed willing to concede space on the vexed issue of veto power for the central bank chief and said a “broad consensus” has been reached with the government on contours of the proposed panel for deciding interest rates.

Ever since the government released a revised draft of the Indian Financial Code (IFC) last month, suggesting a 7-member MPC with a majority of government-appointed members and doing away with the veto power to the RBI chief, there has been a raging controversy with concerns being raised on the RBI’s autonomy getting compromised.

“If we continue to retain the veto (for Governor), it does not change the situation and maintains the status quo,” Rajan said, referring to the current practice where RBI chief can overrule the advice of a Technical Advisory Committee.

— with PTI inputs