Raghuram Rajan Keeps Policy Rates Unchanged, Sensex Dips 70 Points

RBI has also decided to keep the cash reserve ratio (CRR) of scheduled banks untouched at 4.0 percent.

RBI Maintains Status Quo

Outgoing Reserve Bank of India(RBI) Governor, Raghuram Rajan on Tuesday decided to leave key interest rates untouched as he kept the Repo rate unchanged at 6.50 percent.

The move was predicted by 27 of 29 economists in a Bloomberg survey, with two expecting a cut to 6.25 percent, reports BloombergQuint.

RBI has also decided to keep the cash reserve ratio (CRR) of scheduled banks untouched at 4 percent of net demand and time liabilities (NDTL).

Markets React to RBI’s Announcement

Markets reacted unfavourably to the news as the Sensex extended losses and slipped 70 points. Nifty is also trading below the 8,700 mark. The rupee also fell 0.1 percent to 66.88 per dollar, according to prices from local banks compiled by Bloomberg.

RBI however retained growth forecast for FY 2016/17 at 7.6 percent, as it expressed hope over the implementation of GST, saying it will improve business sentiment.

What Lies Ahead

The RBI, which has now become an ‘inflation-targeting’ central bank, has set it sights on bringing headline inflation number down to 5 percent by March 2017.

Rajan said he expected “upside” risks to his March inflation target, citing a hike this year in the salaries of millions of government employees and sticky core inflation, which excludes food and fuel.

As per Tuesday’s announcements, the stance of monetary policy also remains accommodative and will focus to emphasise provisions of liquidity.

Monetary Policy Committee to Decide Interest Rates on 4 October

Governor Raghuram Rajan, in the press conference said the Monetary Policy Committee will decide the interest rate at the next review on 4 October.

Rajan, who demits office after completing his 3-year term on 4 September, also revealed that half of the six-member monetary policy committee (MPC) is already in place and the government will name its nominees shortly.

I think there is some likelihood that the next decision will be made by the MPC rather than an individual. If that is the case, there would be six people sitting together and deciding what the path of interest rates will be. I think we should expect them to take an independent decision and I am sure they will.

Reserve Bank of India

(With agency inputs)