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Oh no! No interest rate cut. RBI policy a washout.

Dr. Raghuram G. Rajan, Governor, Reserve Bank of India announces a hugely disappointing monetary policy.

In its Third Bi-monthly Monetary Policy Statement, 2015-16, RBI decides to continue with the policy interest rates as they are. A cut in interest rates would have been most welcome. So, let's see what arguments does Dr. Rajan put forth, for this rather depressing decision.

Four factors presently impact and guide the RBI's monetary policy:

1. Extent to which the earlier rate reductions by RBI, are reflected in lending rates of banks
2. Effect of monsoon on the food prices and inflation 
3. Government's efforts on easing supply constraints together with reviving stalled projects
4. Likely increase in interest rates by US Federal Reserve Bank and its impact on India

This year, RBI has slashed rates by a total of 0.75% till date. Of this, only about 0.30% reduction has been observed, in median lending rates of banks. More transmission is expected as the loan demand picks up, when banks would benefit from rate cuts to secure new lending. Besides, the Govt. has announced its plan to infuse more capital into public sector banks. This will give them more cash to lend and thus, push the rates further down.

no-cut-in-interest-rate
What a tragedy... Dr. Raghuram Rajan does not cut the interest rates!
On the inflation front, there are both Pressures and Mitigating factors:

Pressures - Sustained inflation in non-food and non-fuel segment. Impact of hike in service tax not yet fully reflected. Sharp rise in prices of certain food products (oil seeds, pulses and protein-rich items).

Mitigating factors - Sharp fall again in crude prices and the likelihood of remaining subdued. Increase in planting of oil seeds and pulses. Govt's proactive supply management alongwith only a moderate increase in minimum support prices.    

So the inflation target of 6% for Jan-Mar 2016 looks maintainable.

Accordingly, as
a) Previous rate cuts have yet to be fully transmitted by the banks to the customers 
b) Three sources of near term uncertainty — persistent inflationary pressure, monsoon and the US Federal Reserve rate hike — are likely to be resolved in the coming months
c) Even at current interest rates there is decent demand for housing and automobiles loans;
the policy rate are being kept unchanged for now, but with an accommodating stance.

And what is RBI's view with regards to Economic Growth:

The Pluses: Oil and commodity prices remain weak. Agricultural output may pick-up if the monsoon is not as bad as earlier predicted. These will improve real income.

The Minuses:  Contraction in exports will be a drag on the economy. The stalled projects see some traction, but the new investments are still subdued.   

As such, while there is a gradual improvement, the forecast for economic growth in 2015-16 is maintained at 7.6%.

In addition, the monetary policy also makes following observations:
- There is a modest recovery in the global economic activity.
- Greek financial crisis, slump in Chinese stock market and uncertainty of increase in interest rates in US, have kept the international financial markets turbulent.
- Economic recovery in India is "still work in progress".
- Liquidity conditions were comfortable.
- Consumption demand seems to be picking up, especially in the urban areas.
- There was a sharp fall in exports. But, this was compensated by a drop in oil prices. Trade of services showed a surplus. Thus the Current Account Deficit was within comfortable limits. This, together with higher FDI and NRI inflows, has boosted the forex reserves to an all time high.

Concluding, RBI continues to play safe. Given that, except US all other economies are in a distress, India should make bold moves. I wonder, if we are squandering away a great opportunity, to become an economic superpower.

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