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RBI keeps Key Rate Unchanged for Now

... Ashish Bharati

Raghuram Rajan has left the key policy rates untouched in its latest Monetary Policy review yesterday. However, he has signaled that rate cuts may follow in future as the economy had started showing signs of some robust growth in a few pockets. Mr Rajan said that the economy was well and truly in recovery but with areas of weakness. He hoped that going forward some of the areas of weakness would turn around. 

The repo rate and the cash reserve ratio (CRR) remained unchanged at remained unchanged at 6.75% and 4% respectively.

The Policy Document has hinted that the central focus of the RBI continues to be inflation. “The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to five per cent by March 2017,” said the policy document.

Transmission of policy rates to the end consumer has been an area of concern for the RBI. Till now the banks are yet to pass on 125 basis point reductions in rates by the RBI. Banks have passed on about 60 basis points of rate relief to customers. To improve transmission, RBI is finalising methodology for banks to compute their base rate (BR) on a marginal cost of funds basis, from the existing cost of funds-based method. This will allow every rate action by RBI will channel into banks’ lending rates through money market rates that get affected first by monetary policies. RBI also said that the government is examining linking of small savings interest rates to market rates.

According to RBI, there are signs of strong growth in the economy but still at an early stage. The second quarter’s gross domestic product growth was 7.4 per cent. Rajan said in the media interaction. “We need sustainable growth, we will ensure there is sustainable growth and we will ensure the maximum sustainable growth we can get.” “Sustainable” means within the bounds of inflation the central bank was willing to accept.

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