RBI governor Rajan keeps rates unchanged in his last policy review

Image: Danish Siddiqui / Reuters

Raghuram Rajan, governor, Reserve Bank of India

Reserve Bank of India (RBI) governor Raghuram Rajan, at his last monetary policy meeting, kept interest rates unchanged on Tuesday, but insisted that the central bank continued to remain accommodative in this stance.

The repo – the rate at which the central bank lends to commercial banks – was kept unchanged at 6.5 percent, while the cash reserve ratio (CRR), the percentage of deposits which banks keep aside with the RBI, was kept unchanged at 4 percent.

"It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. The stance of monetary policy remains accommodative and will continue to emphasise the adequate provision of liquidity," Rajan said in a statement, put up on the central bank’s website.

Most economists and analysts had expected the RBI to keep rates on hold.

Siddhartha Sanyal, chief India economist with Barclays Bank, said Rajan is leaving at a time when the macroeconomic conditions have eased. But he said the management of foreign deposit redemptions in coming months while ensuring that the markets are not disrupted, will be the vote of confidence for the new governor.

"The Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions," Rajan said.
The government is expected to announce the new RBI governor in coming weeks.

Rajan’s decision to keep rates on hold comes at a time when retail inflation -- measured by consumer price index (CPI) -- rose to a 22-month high of 5.77 percent in June, with a sharp pick-up in momentum overwhelming favourable base effects. The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year, the statement said.

“Risks to the inflation target of five percent for March 2017 continue to be on the upside,” Rajan said.

Shanti Ekambaram, president (consumer banking) at Kotak Mahindra Bank said that while risks of inflation remain, a host of positive factors, easy global liquidity and ample domestic liquidity indicate downward trajectory of interest rates in the second half of FY17.”

In June this year, Rajan, much loved by investors and well-respected by academia, disclosed his decision – through a letter to central bank staff – that he did not intend to pursue a second term in office as RBI governor. Rajan completes his three-year term on September 4.

Rajan took charge in September 2013 in one of the most challenging macro-environments for a central bank governor. He managed to guide India’s economy out of a deep gorge in 2013, when the rupee was at a record low, economic growth had slackened and trade deficits were widening. Nearly three years on, the rupee is stable, trade deficits have narrowed and GDP growth at 7.6 percent is the highest among major global economies.

Rajan’s agenda, however, remains unfinished: He has placed a target of 5 percent for consumer price index inflation by March-end 2017. A key programme, the ongoing Asset Quality Review, initiated by Rajan last year, to push public and private sector banks to clean up their balance sheets of rising bad loans, will be watched carefully till its deadline ends in March 2017.

Rajan was, however, confident that the path towards lowering of non-performing assets (NPAs) would not end with his term. “The path is clear. Banks and promoters know what needs to be done from their end,” Rajan said.

RBI deputy governor SS Mundra added: “There has been no elevation in the percentage of stressed assets in the system. The pace of generation of new NPAs has clearly decelerated.”