Rajan leaves rates unchanged, says risks to inflation rising

Citing rising inflationary pressure, RBI Governor Raghuram Rajan today kept interest rates intact but said his monetary policy remains "accommodative" and hinted
at a cut later this year if good monsoon helps ease inflation.
He also exhorted banks to pass on the benefits of earlier rate cuts and emphasised that a better transmission of policy easing remains critical to support growth.
He left unchanged the key policy rate, repo, at 6.50 per cent and the cash reserve ratio at 4 per cent, citing the uncertainties on account of the surge in inflationary pressure and reversal in commodity prices.
"What we are saying is that we have not shifted stance to either a neutral stance or tightening stance. We are still accommodative, that means we are looking for room to ease. If that room opens up we will be able to ease. But now, I can't tell you because there are lots of uncertainties around this. But broadly we are still in easing mode," Rajan told reporters at the customary post-policy briefing.

Explaining the rationale for his caution, Rajan said, "All we are saying is that relative to our April stance, the data prints that came in surprised on the upside. The inflation reading in April was higher than anybody in the markets or we expected.

"Going forward we have to see how inflation pans out. It is a one-month reading. We have to see how the monsoon plays out and how that affects food prices? We also have to look at the supply management by the government. So, a variety of factors will come into play," the Governor said.
He, however, hoped that expectations of a normal monsoon and improved supplies would check any food inflation flare-up.

While industry continued to hope for a rate cut soon, stock market saw a 232-point rally in the Sensex, which some experts attributed to expectations about Rajan's extension beyond his current tenure ending September 3.
While Rajan kept the suspense alive saying a decision is taken in such cases after consultation between the government and the incumbent, he spelt out an 'unfinished agenda' in areas like financial inclusion, containing inflation and bad loans. This was seen by some as a hint that he may continue.
Retail inflation accelerated to an unexpected 5.39 per cent in April and RBI said part of the spike was fuel driven.

Rajan said the April surprise makes the future trajectory of inflation somewhat more uncertain but retained the March 2017 inflation target at 5 per cent with an upside bias.
When asked whether he is hawkish on inflation again, Rajan said: "I hate these bird analogies -- hawkish, dovish etc. I would just say that it is a realistic assessment of the data that have come in. There are potential disinflationary pressures, there are also potential inflationary pressures.