The Reserve Bank of India today held its policy rate and other ratios steady as it keeps a watch on inflation and also the government's committment towards controlling expenditure. The move was largely in line with expectations.
"The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 percent by the end of 2016," the RBI statement said today.
The RBI's policy rate - the repo rate at which it lends to banks - stays at 6.75 percent. Banks' cash reserve ratio, the proportion of funds the banks should keep with the RBI, stands at 4 percent.
The central bank's last 50-basis-point cut in September took markets by surprise, but there were no expectations that it will continue with its aggressive easing in 2016, becuase of a renewed uptick in food-costs driven inflation.
The RBI expects the growth to pick up gradually in 2016-17, despite the headwinds.
It expects a normal monsoon after two consecutive years of rainfall deficiency. Apart from this, it also sees the large positive terms of trade gain, improving real incomes of households and lower input costs of firms should contribute to strengthening the growth momentum.
However, it has cautioned against still weak domestic private investment demand in a phase of balance sheet adjustments, reemergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening export growth.
"Based on an assessment of the balance of risks, GVA growth for 2016-17 is projected at 7.6 percent," it said in the statement.
In a recent lecture, Rajan had warned that macroeconomic stability during the global turmoil cannot be risked and urged the government and RBI should continue to bring down inflation.
“Unfortunately, the growth multipliers on government spending at this juncture are likely to be much smaller, so more spending will probably hurt debt dynamics. Put differently, it is worth asking if there really are very high- return investments that we are foregoing by staying on the consolidation path?” he said. Rajan said that consolidated fiscal deficit of the Centre and states rose to 7.2 per cent in 2015 from 7 per cent in the previous year.