MUMBAI -- The Reserve Bank of India today continued with its status quo for the second straight policy review and kept unchanged its key policy rates as it awaits clarity on the government's fiscal position and more information on inflation.
India's central bank kept the repo rate at 6.75%, and the cash reserve ratio remained at 4% of net demand and time liability. The RBI last slashed interest rates in September by 50 basis points.
"Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and be around 5% by the end of fiscal 2016-17," RBI Gov. Raghuram Rajan said. "However, the implementation of the Seventh Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years."
The government-constituted pay commission, which revises pay scales every 10 years, has recommended a hike of 23.55% in pay and allowances of government employees. The recommendation is likely to be implemented around the middle of the year.
"The Reserve Bank will adjust the forecast path as and when more clarity emerges on the timing of implementation. Vagaries in the spatial and temporal distribution of the monsoon and the impact of adverse geopolitical events on commodity prices and financial markets add additional uncertainty to the baseline," he said, stressing that the RBI will continue to remain accommodative.
The wholesale price index in December was negative 0.73%, while retail inflation rose to 5.61%.
Last Friday, Rajan warned that more spending will probably hurt debt dynamics as the growth multipliers on government spending at this juncture are likely to be much smaller, referring to the forthcoming general budget to be presented by the end of this month.
In the previous budget, the government postponed fiscal deficit targets by a year from the earlier target of 3.6% of gross domestic product. It is now aiming at a deficit of 3.9% in the current fiscal and 3.5% for 2016-17.
The governor noted that since the last policy review in December, global growth has slowed, with the ongoing weakening of activity in major emerging market economies outweighing the recovery in some advanced economies. Financial markets remain vulnerable to bouts of volatility and capital outflows from emerging economies as an asset class and bearish commodity price dynamics are also likely to impact investor sentiment, he added.
However, he refused to comment on the recent monetary policy by the Bank of Japan, which recently introduced the country's first negative interest rate.
"I don't comment on policies specific to central banks. I think my views on monetary policy across the world have been made pretty clear. I believe only this much monetary policy can do and beyond that action should be left to others, but this is a view that can be subject to discussion," he said.
On the domestic front, economic activity lost momentum during the quarter ended December, pulled down by slackening agricultural and industrial growth. He said this mainly reflected weak investment demand, with some deceleration of capital goods production.
"The Reserve Bank's industrial outlook survey suggests a modest expansion of activity likely in Q4 (January to March)," Rajan said.
According to Jonathan Anchen, head of Swiss Re's Economic Research & Consulting India, while the governor felt that it is unfair to read his statements as hawkish, it seems that the RBI is not as dovish as in the previous policy statement.
"In terms of what we could expect in the coming months, the RBI is clearly looking for fiscal measures that boost growth, while at the same time controlling spending before more space can be created for monetary policy to do more," he said.