RBI holds rates

To no one's surprise, Reserve Bank Governor Raghuram Rajan kept interest rates unchanged and signalled that any cuts will have to wait for his second term -assuming he stays on after September -or be left to his successor. The reason for the status quo? Inflation worries for the most part.
Rajan kept all rates and other liquidity measures unchanged as expected but his commentary on inflation suggests there is little scope for a cut at least until October as food prices could lead to a spike in overall inflation.
The central bank appears to have reluctantly held on to its accommodative policy stance, pending data suggesting price pressures will ease. This was evident in the admission of an “upward bias“ to its retail inflation forecast while holding its projection at 5% by March.
There will be a review of the marginal cost of lending rate (MCLR) mechanism to ensure that banks lower lending rates in relation to their cost of funds, said Rajan. The seeming inability of banks to pass on the central bank's rate cuts -a cumulative 1.5 percentage points since January last year -has been raised several times by the governor, although some lenders have made efforts in this direction.
As usual, much will hinge on the June-September monsoon, which is forecast to be above normal, although where and when the rain falls will be critical for crops, food prices and the rural economy.
RBI kept the repo rate, at which it lends to banks, at 6.5% and the cash reserve ratio, the proportion of deposits that banks have to keep with it, at 4%. The penal rate of lending, the so-called Marginal Standing Facility (MSF), stayed at 7%.

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