The Reserve Bank of India has kept the policy repo rate, the base rate at which RBI lends to banks, unchanged at 6.5 per cent on account of high inflation, in line with economist and analyst expectations.
However, in a policy review statement, RBI warns that inflation may inch towards five per cent by March 2017. The pay hikes from the government's implementation of the Seventh Pay Commission may put additional pressure on consumer price index, particularly house rents, Rajan said in a policy review statement released Tuesday.
Rajan gave a positive outlook on the overall economy saying strong monsoon will help in the recovery.
"Accordingly, the GVA growth projection for 2016-17 is retained at 7.6 per cent," said the statement.
RBI also said it will keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4 per cent of net demand and time liabilities.
The passage of the Goods and Services Tax (GST) Bill also bodes well for the growing political consensus for economic reforms in the country, he said.
"While timely implementation of GST will be challenging, there is no doubt that it should raise returns to investment across much of the economy, even while strengthening government finances over the medium-term," the statement said. "This should boost business sentiment and eventually investment."
Addressing mediapersons later, Rajan said that despite easy liquidity, banks have passed past rate cuts into lending rates only modestly.
"Earlier, some bankers said that it was the lack of liquidity that was holding rates high, now I hear from some that it is fear of the FCNR(B) redemptions that is making them reluctant to cut rates," he added.
Other highlights from Tuesday policy review include:
- Industrial production picked up in May on the back of manufacturing and mining, following a contraction in the preceding month. "In fact, capital goods production excluding insulated rubber cables expanded by 8 per cent in the current financial year," said the statement.
- Business confidence has been looking up in recent months, though the Reserve Bank noted that its survey for March 2016 suggests that capacity utilisation, seasonally adjusted, is still weak.
- Internationally, several developments have clouded the outlook for the global economy. Advanced economies growth in second quarter of 2016 has been slower than anticipated, and the outlook is still mixed.
"In the Euro area, the re-emergence of stress in some parts of the banking sector and the Brexit vote increased uncertainty. Among emerging market economies, activity remains varied. GDP growth stabilised in China in Q2, on the back of strong stimulus. In Brazil and Russia, the near-term outlook is still fragile due to policy uncertainties and soft commodity prices," said the statement.
With agency inputs