No surprises, Rajan keeps rates on hold

Touches upon prices, MPC in last policy review; says speeches never criticised government

Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday left interest rates unchanged at 6.5%, citing the need to keep down rising prices as the primary reason for the status quo. Retail inflation, which the central bank tracks for deciding interest rates, stood at a 22-month high of 5.77% in July.

This means your monthly installments on home and personal loans will continue to remain at existing levels, unless banks pass on previous cuts.

Rajan, however, said that a healthy monsoon is likely to bring down food prices, while a pick-up in manufacturing orders shows a revival in rural demand.

But the biggest positive came from deputy governor Urijit Patel, who said Goods and Services Tax (GST) is largely non-inflationary. “About 55% of the CPI (retail inflation) basket will not be impacted by GST. The cascading impact disappears so the effective rate on many goods and services will fall. The full effects, if at all, will only be felt in the second half of the next fiscal year.”

Rajan indicated that the work on forming the monetary policy committee (MPC) was an important agenda. “One person can get pressured in one way or the other. But it’s harder to convince a panel. Therefore, MPC can be a little more independent than a person can be.”

Rajan said he had never criticised the government in his speeches. “Some of those speeches have been on economic issues outside of monetary policy. I think those economic issues are within the remit of the central bank because ultimately we have a remit of macro stability.”