RBI Governor Raghuram Rajan on Tuesday kept interest rate unchanged, saying that a shift in stance is ‘premature’ but hinted that a cut may come early next year if inflation continues to ease and government acts on the fiscal side.
“A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” he said.
Accordingly, the repo rate continues to be at 8 percent while the cash reserve ratio has also been retained at 4 percent.
On the inflation trajectory, Rajan said he expects it to ease further and average at the 6 percent.
“Over the next 12-month period, inflation is expected to retain some momentum and hover around 6 percent, except for seasonal movements, as the disinflation momentum works through,” he said in the bi-monthly review of the monetary policy.
Driven largely by a base-effect, the consumer price inflation for October had come in at 5.52 percent, the fifth consecutive month that it had fallen down.
Under its glide path, the RBI is targeting to get the CPI inflation at 8 percent as of January 2015 and take it down to 6 percent by January 2016. While the 2015 target is achievable, Rajan had in the last policy sounded concerned about the “upside risks” to the 2016 target.
Central forecast for retail inflation is revised downward to 6 percent from 8 percent for March 2015.
Calls for a rate cut had been growing in the run up to the policy announcement, with Finance Minister Arun Jaitley also pitching for lower the cost of capital to boost growth.
The stock market recovered briefly after the policy announcement but was again trading lower than yesterday’s close.
Data released last Friday pointed to a dip in growth in the second quarter at 5.3 percent, leading to the calls for a rate cut getting stronger.
However, the surprising rebound displayed with a 6.3 percent growth in the core sector yesterday, indicating an uptick in factory output, kept everybody guessing about the stance which Rajan adopts.
Additionally, the auto companies also reported an over 10 percent growth in sales for November, after a dip in the preceding month, indicating a revival in the manufacturing sector. Among the eight core sectors, coal and power have done exceedingly well during the month.
The lobby calling for a rate cut had also been pointing to a continuous decline in global crude prices, which have come to a five-year low of around USD 68 a barrel, which has the potential to reduce inflation in an oil-importing nation like India.
However, some experts also warn of the uncertainty over the oil pricing continuing, saying that any geo-political tension will send the prices up again.
—PTI