RBI leaves repo rate unchanged at 7.25%

Central bank also leaves CRR unchanged at 4%

The Reserve Bank of India on Tuesday left its key interest rate unchanged at 7.25%, raising the possibility of a rate cut later in the year. 

The central bank had been largely expected to maintain the status quo, given retail inflation that has crept to an nine-month high of 5.4% in June. Analysts had expected a pause in policy moves, saying the RBI would likely wait for inflationary pressures to subside and for more clarity on when US interest rates will rise.

Inflationary outlook will depend on rains as the monsoon season enters its climax over the next two months.

In its policy review on August 4, however, the RBI took a marginally softer outlook on hardening inflation, saying "...inflation projections for January-March 2016 are lower by about 0.2%, with risks broadly balanced around the target of 6.0% for January 2016".  

At its last policy review in June, the RBI had projected rising food prices could send consumer inflation to the top end of its 2 to 6% target range by January.

The RBI has earlier cut the repurchase, or repo, rate -- the rate at which it lends to banks -- by three-quarters of a percentage point since embarking on an easing cycle in January. The last cut on June 2 lowered the repo rate to 7.25%.

However, banks have been loathe to pass on the benefits of those cuts to industry triggering RBI Governor's Raghuram Rajan's disapproval since the lack of the trickle-down has limited benefits for the economy. 

The central bank, however, retained its growth forecast of 7.6% for the financial year ending March 2016, citing a gradually improving outlook on the back of better real income from the decline in commodity prices and likelihood of better agricultural income if the monsoon continues to improve. 

However, it cautioned that given the downward revision of global growth projections, exports could be a drag on India's economic growth. Also, it pointed out that "supply constraints continue to be binding and new investment demand emanating from the private sector and the central Government remains subdued", 

Part of the reason, of course, is that banks themselves are struggling to contain their basket of non-performing assests. For their part, industry has been complaining about the large debt burden it is saddled with. Indebted Indian companies, especially the mid-sized and smaller ones, argue that the central bank should take comfort in the fall in wholesale price inflation for an unprecedented eight months and cut interest rates further.

The RBI's next policy review is set for Sept. 29. That would be after the Fed's September meeting, and any increase in US rates is expected to suck money out of emerging markets.

"RBI will also wait to see if the Fed raises rates in September as that will potentially impact the volatility in the foreign exchange market," Rahul Bajoria, a regional economist at Barclays in Singapore, said ahead of the policy review.