RBI Leaves Key Lending Rates Unchanged

04/08/2015 12:24 PM IST | Updated 15/07/2016 8:25 AM IST
NEW! HIGHLIGHT AND SHARE
Highlight text to share via Facebook and Twitter
Bloomberg via Getty Images
Raghuram Rajan, governor of the Reserve Bank of India (RBI), speaks during a news conference at the central bank's headquarters in Mumbai, India, on Tuesday, June 2, 2015. India's central bank lowered interest rates for a third time this year and said it'd wait to assess monsoon rains before acting again, an outlook that disappointed investors looking for more cuts to spur weak economic growth. Photographer: Dhiraj Singh/Bloomberg via Getty Images

RBI governor Raghuram Rajan has kept key interest rates unchanged saying that inflation was still a key concern and monsoon rains, which propel farming in India, continued to pose risks to the economy.

After Tuesday's announcement the repo rate, or the rate at which the central bank lends commercially, was unchanged at 7.25 percent and the reverse repo rate, at which the bank borrows from local banks, stays at 6.25 percent.

This is the first time in four quarters that the RBI has not cut repo rates, choosing each time, to reduce it by a quarter of a percentage point to bolster the economy.

In an accompanying press statement, the RBI added that it had already been generous with rate cuts earlier in the year and would consider one again, after the accounting for the financial impact of the US Federal Reserve's likely raising of borrowing costs later this year.

The Federal Reserve meets on 16-17 September and RBI’s next monetary policy review is due on 29 September.

"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," the RBI said, "Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation."

Inspite of the RBI's cuts earlier in the year, industrial growth slumped to 2.7 per cent in May. The Indian Meteorological Department on Monday retained its earlier monsoon forecast of a pessimistic 12 per cent deficit for the full season despite rainfall--and consequently farming--being better than expected in the first two monsoon months of June and July.

Two rounds of retail inflation numbers have shown an increase in the price levels, especially vegetables and food items. Consumer Price Index (CPI) rose to 5.01 percent in May and further to 5.4 percent in July, which is an eight-month high.

CPI food inflation and vegetable inflation too rose in July from 4.8 percent and 4.64 percent, respectively, in the previous month.

Another key concern for the RBI has been the slow speed at which its cuts have prompted commercial lending banks to cut their rates and prompt fresh loans from consumers.

Early this year, the RBI had listed transmission of these rate cuts as a pre-requisite to for further easing.

Though there has been a resounding clamour from industry as well as government to pressure the RBI into cutting rates, most analysts--hours before Rajan's announcement--said they were expecting rates to remain unchanged.

Only one of 13 bankers and economists, whose forecasts for the outcome of Tuesday’s monetary policy review were compiled by Mint, expected another quarter-percentage-point cut.

More On This Topic