Raghuram Rajan leaves rates unchanged; warns of inflation risks

Citing upside risks to the Reserve Bank's inflation target for March 2017, Governor Raghuram Rajan today maintained status quo on key rates at his last policy review meeting, as was widely expected, but underlined that the central bank continues to be accommodative.

"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 emphasize the adequate provision of liquidity," he said in the third bi-monthly review of the monetary policy for the current fiscal.

Accordingly, the overnight repo rate at which RBI lends to the system has been retained at 6.5 per cent, while the reverse repo rate which is paid to banks has been maintained at 6 per cent. The Cash Reserve Ratio will be at 4 per cent.

Rajan said risks to the March 2017 target of 5 per cent for headline inflation --- which climbed to a 22-month high of 5.8 per cent in June --- "continue to be on upside" on factors like food inflation, services and the effect of the seventh pay panel implementation to government employees.

The strong sowing and the positive progress of the monsoon augurs well for the food inflation, RBI said, adding that prices of pulses and cereals are rising.

On growth, RBI maintained its projection of 7.6 per cent on a gross value addition basis, saying the favourable monsoon which is 3 per cent above the average which raises agricultural growth and rural demand and higher consumption on the back of the 7th Pay Commission implementation will be aiding it.

Rajan, who will return to academia after his current three-year at RBI tenure ends on September 4, had started-off his stint here with a couple of rate hikes, which earned him blame from certain quarters as an inflation hawk.

Signing of the inflation targeting framework between the RBI and the Government based on the recommendations of a committee headed by his Deputy Governor Urjit Patel only cemented the reputation.

With the Monetary Policy Committee framework on the anvil, wherein shaping of the policy will shift to the panel, this might also be the last of the Governor-led policy announcements at Mint Street.

RBI on Tuesday welcomed the passage of the Constitutional amendments for transition to the Goods and Services Tax saying it "augurs well for the growing political consensus for economic reforms."