Inflation worries force RBI to maintain status quo on interest rates

Retains repo rate at 6.50% on the back of higher food inflation and expectations of rate action by US Fed

In line with analysts’ estimates, the Reserve Bank of India refrained from lowering policy rates in its second bi-monthly monetary policy meet on Tuesday. The central bank retained the repo or the repurchase rate at 6.50% on the back of higher food inflation and amid expectations of a rate action by the US Federal Reserve. Since the rate-easing cycle began in January 2015, the RBI has reduced policy rates by 150 basis points. Cash Reserve Ratio (CRR) has also been kept unchanged at 4%. 

One basis point is one hundredth of a percentage point.

And the concern on inflation remains can be clearly seen in the RBI's statement. "The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain. The expectations of a normal monsoon and a reasonable spatial and temporal distribution of rainfall, along with various supply management measures and the introduction of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation," the RBI said in its statement. 

The Reserve Bank continued to maintain an accommodative stance and said if all goes well and there is a fall in food inflation, the RBI will be willing to lower rates further. 

All 10 economists polled by Business Standard had said that RBI is unlikely to tinker with its interest rates just a few days ahead of the US Federal Reserve policy review and the British referendum on EU membership. 
 

Analysts expect the RBI Governor to lower rates on August 9, after getting a clearer picture on monsoon. With predictions of above normal rainfall, Rajan may also not have to worry about RBI’s FY17 growth guidance of 7.6%. India’s GDP grew at 7.9% in the fourth quarter of FY16 and full-year growth came in at 7.6%.

The move or the lack of it was largely expected with CPI, or consumer price inflation, coming in at a higher 5.4% in April from 4.8% in March, primarily on the back of food inflation. Wholesale price index, or WPI, too came in at 0.3% in April, after being in the negative territory for 17 consecutive months, though this may not have been a deciding factor for the RBI. Even as rainfall is expected to be good this year, inflation will likely firm up further, economists fear. Some even fear that inflation could reach way beyond RBI's mandate of 5% for the next year.

Added to this, the market was expecting the US Federal Reserve to raise rates during its June 14-15 meeting. However, Friday’s weaker-than-expected jobs data (US) may result in Janet Yellen not raising rates until further indication that the US economy can remain or stay on track.

The Governor also sidestepped all questions on the specualtion around his tenure extension. Reading from a prepared statement, Rajan said, "It would be cruel of me to spoil the fun that the press is having on my extension. In all such cases, a decision is reached after discussions between the government and the incumbent. I am sure that you will know when a decision is reached on my second term." Rajan also said that he is surprised by the letters he has supposedly written to the government as reported in the media where he is said to have expressed his non-willingness to continue.