The Reserve Bank of India (RBI) has kept its policy rate - the repo rate at which the central bank lends to banks - steady at 6.5 percent, citing fears of an upside in inflation risks as it waits for a good monsoon.
"The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain," the RBI said in its statement explaining the rationale. The RBI has also retained banks' cash reserve ratio at 4%.
Among the risks for an inflation upside are firming international commodity prices, particularly of crude oil; the implementation of the 7th Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel, the RBI said.
It has maintained the inflation projection of April with an upward bias.
The RBI's move is along expected lines. A Reuters poll of 44 economists had shown that they mostly expected the rate to be kept on hold for now with just one more rate cut in the coming year.
The central bank seems to be as concerned about services inflation as it is about food inflation.
"Services inflation remained elevated on account of house rents, water charges, tuition fees and taxi/auto fares. Excluding petrol and diesel from this category, inflation was sticky and above 5 per cent," it has said in the policy.
While it expects the domestic growth to improve going forward, global factors are likely to temper the business confidence.
"Domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the Seventh Pay Commission award. Higher public sector capital expenditure, led by roads and railways, should crowd in private investment, offsetting somewhat the subdued appetite for fresh private investment due to financial stress," it said.
It has retained the 7.6 percent GVA growth projection for 2016-17.
On private investment, which has been mission for years now, the RBI said higher public sector capital expenditure, led by roads and railways, should crowd in private investment, offsetting somewhat the subdued appetite for fresh private investment due to financial stress.
Read full policy statement below: