RBI keeps growth forecast at 7.4%, holds interest rates

Inflatiory trends, Seventh Pay Commission proposals fallout will be monitored, says Rajan

MUMBAI, Dec 1: The Indian central bank on Tuesday kept its short-term lending and borrowing rates unchanged, balancing its policy action between a comforting 7.4 percent economic growth for the fiscal’s second quarter and a creeping inflation, a decision which India Inc said was on expected lines.

In its fifth bi-monthly monetary policy review of the current fiscal conducted by Reserve Bank of India Governor Raghuram Rajan here, the repurchase rate at which short-term credit is extended to commercial banks was left unchanged at 6.75 percent.

Accordingly, the reverse repurchase rate, or the interest paid by the central bank for short-term borrowings, also stood frozen at 5.75 percent. The statutory liquidity ratio and cash reserve ratio that banks have to keep in liquid assets and government securities also remained intact.

The RBI also kept its overall growth projection for 2015-16 at 7.4 percent and said the inflation target of 6 percent in January next year as set out in the previous policy update also was within reach, albeit with a slight downside risk.

Rajan, however, left open the door for more easing, noting weak rural and global demand was holding back economic growth, while highlighting pockets of weakness in sectors such as construction. “The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017,” Rajan said in his statement.

The Reserve Bank will follow developments on commodity prices, especially food and oil, even while tracking inflatiory expectations and exterl developments, he said.

The implementation of the Seventh Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path, RBI said.

Soon after the monetary policy update, the sensitive index (Sensex) of the Bomay Stock Exchange and the Nifty of the tiol Stock Exchange (NSE) took a slight dip, but stabilised thereafter, as investors felt the pronouncements were on expected lines.

Rajan, who expressed concern over farm growth and retail inflation, remained neutral on services sector and saw some ray of hope with a pick up in factory output growth, said: “We’re seeing an economy that is well and truly in recovery, but with areas of concern.”

The RBI Governor also sought once again to nudge the commercial banks to cut interest rates.

He said since January, when the RBI started cutting its lending rates and easing its monetary policy stance, less than half of the cumulative policy repo rate reduction of 125 basis points has been passed on by commercial banks. “The median base lending rate has declined only by 60 basis points,” Rajan said.

“The government is examining linking small savings interest rates to market interest rates. These moves hould further help transmission of policy rates into lending rates,” he added.

At the same time, he said that there was no plan to tighten the policy stance. “We’re still accommodative and that is clear. We’re also vigilant,” Rajan told a press conference soon after unveiling the policy update to queries if there was a change of stance in the RBI’s outlook.

“The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017.”

Investors kept an optimistic outlook with the RBI announcing that it will maintain an accommodative stand on future rate cuts and that the economy is eventually limping towards a marked recovery.

Indian equity markets opened on Tuesday on a positive note, cheered by the modest growth in Monday’s gross domestic product (GDP) figures for the second quarter, which showed a gradual recovery in the country’s economy. However, the gains were capped after a slowdown in demand was indicated by a lacklustre eight core industries (ECI) and purchasing magers index (PMI) data.

India Inc on Tuesday termed the RBI move to keep rates unchanged as being on expected lines.

“The RBI’s decision to maintain status quo was in line with expectations, given that there has already been a reduction of 50 basis in the last policy,” Confederation of Indian Industry director general Chandrajit Banerjee said in a statement here. “The focus has now shifted to the transmission of lower policy rates to banks’ lending rates. CII is happy to note that the RBI intends to maintain an accommodative policy stance,” he said.

ICICI Bank chief executive Chanda Kochhar said: “As the impact of monetary policy measures taken so far play out in terms of bank funding costs, lending rates are expected to continue to moderate. The central bank has expressed strong confidence in the government’s commitment to fiscal consolidation.”.

State-run State Bank of India chairman Arundhati Bhattacharya said: “Governor’s indication of being accommodative policy sends a positive sigl for Indian economy. The guidelines on the base rate calculation based on margil cost of funds will be watched and appropriate actions will be taken on the same.” (IANS)