Fifth Bi-Monthly Monetary Policy Statement on December 1, 2015 by Governor Rajan: RBI opts for the status quo

RBI to use the breathing space to improve the monetary policy transmission

RBI Watch                                                                                    Monetary Policy 2015-16

RBI made no change in the repo rate and related rates. This is what was expected by most RBI watchers and me.

I expect RBI to ease further only in the next financial year. Please read my blog of October 8, 2015 for RBI’s current stance and the future course of the repo rate.

RBI has made no significant changes in its projections of inflation and output going out to March 2016, the end of this financial year.

Governor Rajan stated that his focus now would be on getting banks to pass on more of the 1.25% reduction in the repo rate since January – banks have passed only by half of this in terms of a lower lending rate to customers, although deposit rates for customers have come down significantly.

Within a week’s time, he promised fresh guidelines on bank lending based on the marginal cost of funds. I do not believe that RBI should be mandating this. Please read my blog of April 14, 2015 on this subject. He indicated that RBI is working with the government to link the rate on the government’s savings schemes to the market rate of interest. Finally, to get banks to lend more he wanted banks to further recognize and deal with bad debt.

The real question now is what could prompt RBI to change its monetary stance – surprisingly shift to a tightening monetary stance. This needs to be a shock of some sort, I guess. I hope to write a blog on this in a week or so.