Free Press Journal

Inflation surprise prompts Reserve Bank to hold lending rates


Indian shopkeepers wait for customers at a roadside vegetable shop in Mumbai on June 12, 2015. India's industrial output and inflation quickened, official data showed June 12, 2015, suggesting that Prime Minister Narendra Modi's reforms were helping revive economic activity. However, analysts maintain the Reserve Bank of India (RBI) would wait till end of the monsoon rains before taking a call on its interest rate policy. Consumer prices rose 5.01 percent in May from a year ago and from 4.87 percent increase in April. AFP PHOTO/ Indranil MUKHERJEE

Mumbai: Along expected lines, the Reserve Bank of India (RBI) on Tuesday left its key policy rates and reserve ratios unchanged, concerned over the slight rise in inflation and some domestic and global upside risks that have sprung up since April. In its reaction, India Inc hoped for further transmission of earlier rate cuts it had made.

The decision was taken at the second bi-monthly policy review for the current fiscal by Reserve Bank of India (RBI) Governor Raghuram Rajan at its headquarters here. “The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” he said.

The central bank also retained India’s growth forecast at 7.6 per cent for this fiscal.

Rajan once again called upon commercial banks to transmit its past cuts in policy rates to retail customers. He said the government’s reforms on small savings interest rates and the central bank’s own review soon of commercial lending rates should moderate the cost of funds.

In the first bi-monthly policy review on April 5, Rajan had cut by 25 basis points the repurchase rate, or the short-term lending rate for commercial banks on loans taken from the RBI — to 6.5 per cent from 6.75 per cent.

In the policy statement, Rajan qualified the upside risks as firming global commodity prices for items like crude oil, the implementation of the 7th Central Pay Commission report, the rise in inflation expectations and overall price scenario.

“The inflation projections given in the April policy statement are retained, though with an upside bias. Considerable uncertainty surrounds these projections, which should be clarified by incoming data in the next few months,” he said.

“Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative.”

To deal with any market disruption from outflows of up to $20 billion by redemption of foreign currency non-resident (FCNR) deposits, the RBI will provide dollar and rupee liquidity if needed, Rajan said.

He, however, also warned the markets not to be complacent.

“We don’t want to encourage complacency on the part of people who have sold us dollars, assuming that we will come in if they can’t provide the dollars to us and bail them out. That is not the intent at all,” he said.

Later taking a reporter’s query on the issue, Rajan said he was not “overly perturbed” by the surrender of payments bank licence by some companies, and suggested putting in place a mechanism to ensure that firms exercised due diligence before applying for licence in view of the cost involved in the applications’ scrutiny.

In a reaction, Marie Diron, Senior Vice President, Sovereign Risk Group at Moody’s Investors Service, said no significant changes in monetary policy was expected in the near future.

“Rather, the transmission of monetary policy will influence India’s economic developments and credit profile,” Diron said, adding factors that will contribute towards these are clean-up of bank balance sheets, implementation of the bankruptcy law and inflation control.

Industry chamber Ficci president Harshavardhan Neotia said while the decision was on expected lines, “we do hope that continuous focus of the central bank on improving the transmission of the previous rate cuts into lower lending rates would yield effective results and that we will see a greater pass through going ahead”.

ICICI Bank Chief Executive Chanda Kochhar said: “The RBI’s continued commitment to an accommodative policy stance and the assurance of moving towards a neutral liquidity framework is positive. This should continue to support transmission of RBI’s policy stance.”

Assocham president Sunil Kanoria said that the RBI “has not given any surprise to the industry”, while Max life Insurance Director Mihir Vora said the RBI has “also maintained the accommodative stance and the focus continues to be on the transmission of the previous rate-cuts into lower lending rates”.

Confederation of Indian Industry President Chandrajit Banerjee however said the RBI could have given more emphasis to the need to continue the rate-cutting cycle.

“At this time when credit demand is still flat and industry is facing a demand crunch, a rate cut would have done much to restore the investment cycle,” he said.