Reasons|Why RBI didn’t cut their repo rates


The Reserve Bank of India its monetary policy announcement on Tuesday said that it is keeping the policy rate unchanged at 7.25 per cent and the cash reserve ratio unchanged at 4 per cent.


The debt-ridden Greece crisis  has receded for the time being.  The geopolitical risks from Russia  and Ukraine are also not dictating the financial markets  any longer.  Crude prices are on the downswing to $55 a barrel and inflation (CPI) is under 6 per cent as targeted by the Reserve Bank of  India (RBI) by January next year. The drought-like situation portrayed one and a half months ago has also receded to a great extent.

After almost a two-year long wait, the Reserve Bank of India (RBI) has finally decided to play ball on the interest rate cuts. It  has reduced the repo rate, the rate at which it lends to banks, by 25 basis points from 8.0 per cent to 7.75 per cent.


We look at the reasons why RBI Governor Raghuram Rajan didn’t go for a rate cut this time.

“Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016,” says RBI. The fall in inflation was driven by two major constituents – crude and the food prices. Crude has fallen to US $50 a barrel from over US $100 a barrel in 2014.

Banks passing on to consumers only less than half of its previous rate cuts: To the central bank’s chagrin, the benefits for the broader economy have been limited because of commercial banks’ reluctance to lower their lending rates. The Reserve Bank of India (RBI) has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent, since January, when it embarked on an easing cycle. The banks, however, have passed on only 0.3 per cent to borrowers.

After keeping interest rates at near zero for close to seven years, the US Federal Reserve will soon be taking a call to start raising short-term Fed rates. This could become reality in September. In fact, one of the reasons for the rupee’s depreciation is in anticipation of rising rates in the US and the consequent outflow and reduced dollar flow into India. Clearly, the turn of interest rates cycle will be gradual and it will only move up.

While highlighting the policy stance, RBI Governor Raghuram Rajan said the key to further easing are data that confirm continuing disinflationary pressures. “Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. The latter would be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation,” said Rajan.


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