RBI keeps repo rate unchanged at 6.75%

Projects GDP growth at 7.6% for FY17, but Raghuram Rajan cautions Seventh Pay Commission not factored in

The Reserve Bank of India (RBI) kept its key policy rate unchanged in its sixth bi-monthly monetary policy review on Tuesday, even as it indicated that rates would continue to soften, prompted by benign inflation and weak economic and industrial growth.

A pause in rate cuts was widely expected by the market and the analyst community. A BS poll on the policy had indicated that the central bank would not want to take any action on rates before the Union Budget scheduled for February 29.

After the latest review, the repo rate, or the rate at which the central bank infuses liquidity into the system, remained at 6.75 per cent. The cash reserve ratio (CRR), or the portion of a bank’s money maintained with the central bank in cash, remained at 4%.

Retail inflation as measured by the Consumer Price Index was at 5.61% in December, lower than RBI's own expectation of 6% by January 2016; however, the index of industrial production (IIP) shrunk to 3.2% in November, raising expectations that the RBI would, sooner or later, have to ease its policy rate. 

In its review Tuesday, the central bank set a target of 5% retail inflation by January 2017, even as it took a hawkish stance on retail inflation. 

The RBI also said that it expected growth at 7.4% in financial year 2016 and 7.6% for the financial year ending March 2017. However, Governor Raghuram Rajan cautioned that the recommendations of the Seventh Pay Commission had not been factored into its growth projections. 

The RBI said that the near-term outlook for industrial activity may be constrained by adverse base effects in Q4 and still weak exports, although the pick-up in corporate profitability on the back of declining input costs may provide an offset. It added that Gross Value Added (GVA) growth for 2015-16 is kept unchanged at 7.4% with a downside bias.

"The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17," the central bank said in its statement.

Equity markets trimmed intra-day gains after the RBI's decision to keep policy rates unchanged. At 11:05 a.m., the S&P BSE Sensex was down 20 points at 24,805 while the Nifty50 was down 14 points at 7,542 points.