taying put on his inflation-focussed monetary policy, outgoing RBI Governor Raghuram Rajan on Tuesday kept key rates unchanged citing upside risk to prices of food and services even as he said the central bank remains ‘accommodative’ and blamed banks for being tight-fisted in passing on previous rate cuts. Banks, however, ruled out any immediate lowering of rates for retail borrowers and industry, which has been pitching hard for steps to make capital cheaper to push growth.
In the third bi-monthly policy review of this fiscal, RBI kept the benchmark repurchase rate (at which RBI lends to the system) at a 5-year low of 6.50 per cent. This is the second review in a row when Rajan has maintained status quo.
The reverse repo rate, which is paid to banks, remains at 6 per cent, while Cash Reserve Ratio will stay at 4 per cent. Stock markets reacted negatively, though RBI hoped to meet inflation target of 5 per cent for March 2017 and maintained its GDP growth forecast at 7.6 per cent despite a weak global economic scenario.
Presenting his last monetary policy review, Rajan, who has decided to return to academia after end of his three-year tenure on September 4, came down heavily on banks for “only modestly” passing on the benefits of previous five policy rate cuts since January 2015, on one pretext or the other.
He said “easy liquidity conditions” and market competition should pro-mpt banks to lower the rates, while announcing that changes are underway to the way banks decide their lending rates. He apprehended, however, that lenders would list yet another ‘concern’ for keeping rates high.
Rajan, whose tenure at RBI has been marked by several controversies with some accusing him of focusing too much on inflation at the cost of growth, sought to make light of his critics saying he has also been getting ‘anonymous thank you notes’ even while on a plane. He exuded confidence that measures taken by the RBI during his term would continue to show positive results. He said the new rate-setting regime under a six-member Monetary Policy Committee – a cause he championed – should be in place before the next review on October 4. That would make today’s review the last one to be led by the Governor alone.
Rajan, former IMF Chief Economist and on-leave Professor of Finance at Chicago University, said the clean-up process of the banks’ balance sheets is on track. Giving a rationale for keeping rates intact, RBI said risks to the March 2017 target of 5 per cent for headline inflation, which climbed to a 22-month high of 5.8 per cent in June, “continue to be on upside” on factors like food inflation, services and the effect of 7th Pay Commission implementation for government employees. “It is appropriate for RBI to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action,” Rajan said at the customary post-policy press conference.