Reserve Bank of India Governor Raghuram Rajan on Tuesday left the benchmark interest rate, the repo rate, unchanged at 6.75 per cent as expected, and stressed the RBI’s policy stance remained “accommodative”.
The comment signalled the central bank was prepared to continue with more monetary easing, if needed, to support an economic recovery.
“We are still accommodative, that is very clear,” Mr. Rajan said.
“But we are also vigilant. There are obviously both upside and downside risks with consumer price inflation so vigilance is always needed.”
The central bank has reduced the repo rate by 125 bps in 2015 in order to boost growth amid softening inflation. “Inflation has turned up as anticipated, and is expected to rise further until December before plateauing,” the central bank said in a statement, explaining its policy rationale.
Consumer price inflation, the RBI’s main gauge for measuring price gains, quickened to a four-month-high of 5 per cent in October though the central bank appears on course to meet its January inflation target of 6 per cent.\
While the central bank had kept the rate unchanged, Mr. Rajan said he was focussed on ensuring monetary transmission improved as less than half its cumulative 125 basis points reduction in the policy rate had been transmitted by banks. Banks have reduced the base rate, which is the benchmark rate for loans, by 50-70 bps.
“The on-going clean-up of bank balance sheets will help create room for fresh lending. 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 5 per cent by March 2017,” the RBI said.
Mr. Rajan said he expects banks will complete a full clean-up of their balance sheets by March 2017, which in turn would free up resources for more investment funding.
He also said the central bank will issue new norms this week on how banks will calculate the base rate, based on their marginal cost of funds.
“The guidelines on the base rate calculation based on marginal cost of funds will be watched and appropriate actions will be taken on the same,” said Arundhati Bhattacharya, chairman, State Bank of India.
On growth, the central bank said the economy is in the early stages of recovery and retained its growth forecast for this fiscal at 7.4 per cent with a ‘mild downside bias’. The RBI’s survey of order books, inventories and capacity utilisation show that there was robust growth in new manufacturing orders in the second quarter.
The RBI governor also stressed the need for fiscal consolidation, which is also required for further monetary easing. In this context, he said that the impact of the seventh pay commission’s proposals need to watched. The pay panel’s direct effect on aggregate demand is, however, likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path, he said.
“The central bank has expressed strong confidence in the government’s commitment to fiscal consolidation,” said Chanda Kochhar, managing director and chief executive officer, ICICI Bank. “Overall, macro-economic conditions are conducive for an improving growth trajectory as the various policy measures announced by the government take effect.”
