Rajan doesn’t cut rates

In his last policy, Reserve Bank of India Governor Raghuram Rajan has kept the key rates unchanged citing the fear of price rise. So, the repo rate would stay at 6.5 per cent and the cash reserve ratio at 4 per cent.

“The recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year. Moreover, prices of pulses and cereals are rising and services inflation remains somewhat sticky,” the RBI statement said.

“Risks to the inflation target of 5 per cent for March 2017 continue to be on the upside. Furthermore, while the direct statistical effect of house rent allowances under the 7th CPC’s [Central Pay Commission’s] award may be looked through, its impact on inflation expectations will have to be carefully monitored so as to pre-empt a generalization of inflation pressures. In terms of immediate outcomes, much will depend on the benign effects of the monsoon on food prices,” the policy statement said.

It may be mentioned that consumer price inflation rose to 5.77 per cent in May, which was above the central bank’s stated March 2017 target of 5 per cent. While crude oil prices are down 20 per cent from their recent crests, inflationary pressures are expected from the implementation of the 7the CPC and the rollout of the goods and services tax or GST.

Last week, the government had accepted the RBI’s medium-term retail inflation target with a 2 percentage point upper and lower tolerance levels.