RBI Governer Raghuram Rajan Keeps Indian Policy Rate On Hold At Last RBI Review

By Sona Kadam on August 9, 2016 at 12:36 PM

India’s central bank governor Raghuram Rajan on Tuesday kept the repo rate INREPO=ECI unchanged at 6.50 percent at his final policy review after inflation hit a nearly two-year high, but said the policy stance remains “accommodative.”

This was Rajan’s last monetary policy review as the governor of the central bank before he steps down on September 4.In the policy statement, RBI kept a positive outlook on the economy saying abundant monsoon will help in the recovery.

As Rajan presented his final monetary policy, the government has still to pick a successor to the highly respected former International Monetary Fund chief economist.

“It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action,” Rajan said in a statement.”The stance of monetary policy remains accommodative and will continue to emphasize the adequate provisions of liquidity.”

The move vindicates Rajan’s policies on a no-holds-barred strategy to rein in prices and keep inflation well below interest rates on fixed deposits.

The approach, which won him few supporters and in fact, helped the din against his re-appointment, also underscores the government’s tacit agreement that the environment is not conducive for a rate cut. That is probably what will happen on Tuesday too.

The third bi-monthly monetary policy for this fiscal will likely retain the repo rate — the rate at which banks borrow short-term funds from RBI — at 6.5% as retail inflation is still above RBI’s targeted level.

Rajan has also persuaded the government to form a monetary policy committee, with three members from the RBI and three chosen by the government to decide interest rate changes. The RBI Governor will cast the deciding vote in case of a tie.

Rajan, who leaves in early September, also made it clear that he was committed to using the rest of his term productively. “This is my last policy statement, but there are still 28 days in my term which I intend to use fully.”