RBI Governor Raghuram Rajan today kept the key Policy Rate unchanged in its second Bi-monthly Monetary Policy review, cited higher upside risks of inflation trajectory. 

Reserve Bank of India keeps the Repo Rate unchanged at 6.5 percent at five-year low, which was reduced in first Bi-monthly policy review in April this year. Repo rate is the rate at which Reserve Bank of India lends to banks in the country. RBI also kept the cash reserve ratio (CRR) unchanged at 4 percent.

The reverse repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 6 percent, and the marginal standing facility (MSF) rate will at 7 percent.

“Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action,” said Mr. Rajan said in a statement.

The ebbing of inflation pressures for two consecutive months to March, after a period of steady rise, was interrupted once again in April. Retail inflation measured by the consumer price index (CPI) rose more sharply than expected due to a more-than-seasonal jump in food prices. 

Within the food group, inflation in respect of vegetables, fruits, sugar, meat and fish rose sizably from their prints in the previous month. Inflation in respect of pulses remained elevated; the recent decline in prices of pulses reversed, yielding a sharp increase in April. CPI inflation excluding food and fuel edged up in April, driven by prices of petrol and diesel embedded in transport and communication. Clothing and footwear also registered moderate increases in inflation.

Domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the Seventh Pay Commission award.

Higher public sector capital expenditure, led by roads and railways, should crowd in private investment, offsetting somewhat the subdued appetite for fresh private investment due to financial stress. Yet, business confidence will be restrained to an extent on account of unrelenting global factors, said the Governor. 

While talking about the global economy, Mr. Rajan said, since the first bi-monthly statement of April 2016, global growth is uneven and struggling to gain traction. World trade remains muted in an environment of weak demand. In the United States, growth was slow once again in Q1 because of contracting industrial activity and exports. Recent indicators of labour market activity have also weakened.

GDP growth slowed sequentially in China in Q1, with retail sales, industrial production and fixed investment showing signs of weakness in recent months amidst still rising levels of indebtedness among households and corporations.

Since January 2015, RBI has reduced repo rate by 1.5 percent, including a 25 basis points in April 2016. 

RBI also retained retail inflation target at 5 percent for January 2017. 

The third bi-monthly monetary policy statement will be announced on August 9, 2016.

Source: Information has been obtained from RBI press release.