RBI holds policy rate steady at 6.75%

Eyeing rising retail inflation and the US Fed's expected rate hike this month, the Reserve Bank of India on Tuesday left its key policy rate unchanged

As expected by economists and markets, the Reserve Bank of India on Tuesday held its repo rate steady at 6.75%, having cut the policy rate by as much as 75 basis points in three tranches earlier this year. Repo, or repurchase, is the rate at which the central bank lends money to commercial banks.
 
Most predictions had said the RBI would hold the rate at its bimonthly policy review Tuesday, arguing that Raghuram Rajan would likely wait until the US Fed makes a move on raising interest rates there; some even suggest that the RBI Governor might hold off of any more rate cuts until the next Budget.

 
India’s economic growth, however, continues to lag behind the expected curve. For the quarter ended September 2015, India’s GDP grew at 7.4%, bumped up by a manufacturing boost, but made it all but impossible that the country would achieve an 8% rate of growth.
 

Other economic data has also been lackadaisical;. Core sector growth on Monday came in at 3.2% for the month of October, unchanged from the previous quarter and down steeply from 9% last year.
 
The Index of Industrial Production in September grew at a slower-than-expected pace of 3.6%, held back by slower expansion in the mining sector.

 
But retail inflation, which the RBI uses as a key variable to decide on interest rate policy, has also been inching up: it grew to 5% in October from 4.4% in September, largely due to a 33.5% jump in the price of pulses, a staple in most parts of the country, a below-average monsoon that has created large pockets of drought, and despite a global decline in commodities prices. However, it remained within the RBI’s target of 6% by January 2016.
The creeping rise in the Consumer Price Index, used to measure retail inflation, also made it less likely that the central bank would consider a policy rate cut at this time of the year.