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RBI keeps repo rate, CRR unchanged

April 7: The Reserve Bank of India (RBI) kept the repo rate unchanged at 7.5% in its monetary policy review on Tuesday. Along market expectations, Raghuram Rajan also kept the Cash Reserve Ratio (CRR) at 4%.

Rajan kept policy rate unchanged awaiting clarity on impact of unseasonal rains on food inflation even as he wanted banks to pass on benefits of previous two rate cuts.

"Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review," said Rajan in his statement.

Unseasonal rains and hailstorm have impacted rabi crops across North and Western India, raising fears of spike in food prices.

Rajan affirmed his commitment to the accommodative stance, but added that policy moves will be shaped by incoming data and added that transmission of rate cuts by banks will be his top-most priority. Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data," RBI said in its policy statement.

The RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates. Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts, said RBI.

"The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years. The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18," RBI said.

According to RBI, the outlook for growth is improving gradually. "Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy. Along with initiatives announced in the Union Budget to boost investment in infrastructure and to improve the business environment, these factors should provide confidence to private investment and, together with the conducive outlook on inflation, deliver real income gains to consumers and lower input cost advantages to corporates," said RBI.

In January and March, RBI cut the repo rate by 25 bps each but that hasn't trickled down, barring some state-owned banks. A basis point is one-hundredth of a percentage point. A 50 bps CRR cut would free up about Rs 43,000 crore funds, adding to liquidity in the banking system.

According to Rajan, it takes three or four quarters for RBI's rate action to be transmitted through to the banks. This would mean lenders should be reducing rates by October, when loans are seen starting to pick up.