RBI Keeps Policy Interest Rate Unchanged At 6.5%

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New Delhi: The Reserve Bank of India Governor Raghuram Rajan on Tuesday kept the main policy interest rate unchanged at 6.5%, in line with analysts’ expectations. He also kept everyone on tenterhooks about his future once his three-year term ends in September.

“It would be cruel of me to spoil the fun the press is having.The government and the incumbent decide on the extension of an RBI Governor’s tenure,” said Rajan. “You will know when there is news,” he added cryptically.

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The RBI said the reverse repo rate also stayed unchanged at 6%. The cash reserve ratio of scheduled banks remains unchanged at 4.0%.  The announcement was made after the bi-monthly monetary policy meeting.

The bank also said that April’s inflation reading makes the future trajectory of interest rates somewhat more uncertain. Rising crude prices and the implementation of the Seventh Pay Commission pose an upside risk to inflation, it added.

“We will have to figure out ways to attain 5% inflation target set for Jan 2017,” Rajan said.  The RBI also retained the growth projection of 7.6 percent for 2016-17 citing corporate profits and a surge in consumption. The central bank said it will also soon review the implementation of marginal cost lending rate framework by banks.

In addition, Rajan said the cleaning up of banks’ balance sheets will continue. “There is no more going back to the days of forbearance,” the RBI governor said.

Most economists polled by Reuters said RBI governor Raghuram Rajan could cut the repo rate by 25 basis points between July and September if the forecasts that there will be a good monsoon are proven correct. They said that if another cut does happen it will possibly be the last reduction in rates in the cycle.

The RBI governor has lowered interest rates by as much as 150 basis points in the past year, to the current 6.5%, which is a five-year low. “This is a sweet spot for the RBI, with inflation on track and an upward bias to growth,” said A. Prasanna, an economist at ICICI Securities Primary Dealership Ltd in Mumbai, to Reuters. “Overall the policy stance will be balanced with no rate cuts unless there is better clarity on the monsoon”, he added.

Last week, it was announced that GDP grew 7.9% in the January-March quarter, which made India the world’s fastest-growing economy. Economists told Reuters that Rajan will now focus on persuading banks to pass on the benefits of earlier RBI rate cuts to borrowers, as the banks have only lowered lending rates by 65 basis points since early 2015

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