Rates on hold: RBI in wait and watch mode

Second Bi-Monthly Monetary Policy Statement on June 7, 2016 by Governor Rajan 

Monetary Policy                                                                                                     2016-17

                                                                                             

 As I expected there was nothing surprising in Governor Rajan's statement.  RBI kept it key policy rate - the repo rate - unchanged at 6.5%. 

Please read my related blogs of April 13, 2016 and April 1, 2016. I had expected the RBI to reduce the repo rate by about 0.5% in 2016-17, with the first cut not before the June or August monetary policy statements, by when the picture on India's monsoon – an important factor in determining food price inflation - would be fairly clear . However, in the April 5 statement, RBI reduced the repo rate by 0.25% to 6.5%.

In the second week of April, the Meteorological Department announced that it expects this year the monsoon to be normal or in excess.

CPI has trended higher over the last two months - April (5.47%) and May (5.76%) have come in above the 5% target set for March 2017. The RBI expects the path of inflation to rise and then fall to 5%, although the April number came in above RBI’s expectation. On balance, however, RBI saw no change in the inflation outlook for period up to March 2017.