The Reserve Bank of India has kept key rates unchanged. Lending (repo) rate was left unchanged at 7.25 per cent and the Cash Reserve Ratio (CRR) remained the same at 4 per cent in the monetary policy review.
RBI Governor Raghuram Rajan citied a spike in food prices and banks passing on to consumers only less than half of its previous rate cuts as the reason for not changing the rates.
“Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” said Rajan.
The RBI will look for more room to ease policy rate depending upon fuller transmission of rate cuts by banks, food prices and US Federal Reserve normalisation signs, Rajan added.
The banks have passed on only 0.3 per cent to borrowers, he explained.
Since January 2015, RBI has reduced the policy rate by a total of 75 basis points as it embarked on an easing cycle.
On Monday a top Finance Ministry official had pitched for a rate cut. It would have been the fourth rate cut this year. The official argued that inflation cannot be the sole driving factor in deciding on monetary policy action.
RBI kept the interest rates unchanged because it did not want to risk inflation to surge. Other factors included a poor monsoon and the possibility of an increase in interest rates in the US next month.
RBI said sustained hardening of inflation, excluding food and fuel, is “most worrisome”.
“Significant uncertainty will be resolved in the coming months, including likely persistence of recent inflationary pressures, full monsoon out-turn, as well as possible Federal Reserve actions,” the RBI Governor said.
Inflation projections for January to March 2016 are lower by about 0.2 per cent, Rajan said. He also retained the economy growth forecast at 7.6 per cent for 2015-16, saying the outlook was gradually improving.
Meanwhile, Rajan also spoke about the veto power he has as an RBI Governor in deciding interest rates. Rajan is in favour of doing away with the veto power of the RBI chief. According to him, it is better for a Monetary Policy Committee (MPC) to decide the key rates rather than one individual.
“Currently, the situation is governor has a veto, that is, effectively all advice is only advice and ultimately decision is Governor’s. So, if we continue to retain a veto, it doesn’t change the current situation. It maintains the status quo. That is something to keep in mind,” Rajan told the media.
A revised draft of the Indian Financial Code (IFC) released by the Finance Ministry last month suggested that RBI Governor’s veto power should be done away with and a seven-member MPC should take decisions by a majority vote. The draft proposed that of the seven members, four should be government nominees and the remaining 3 should be from RBI.
Under the present system, the Reserve Bank Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.
On Monday Finance Secretary Rajiv Mehrishi said that the RBI and the government have reached an agreement on composition of the MPC and it will be disclosed in Parliament soon.