Raghuram Rajan Holds Repo Rate, Says Budget Key To Further Cuts

Mumbai: The Reserve Bank of India (RBI) kept its policy rate on hold at 6.75 per cent on Tuesday, as widely expected, opting to wait until after the government's budget statement in February to decide on whether to cut interest rates further.

Having cut the policy repo rate by 125 basis points (1.25 per cent) in 2015, RBI Governor Raghuram Rajan warned on Friday against straying from the path of fiscal consolidation or relaxing the fight against inflation.

Dr Rajan, in his statement on Tuesday, said the central bank would stay "accommodative" but would look forward to the government's budget on February 29, saying it needed to be one that supports growth and controls spending.

How the government implements a planned 24 per cent pay hike in salaries and pensions for some 1 crore current and former government employees will also be key in determining the path of inflation, he noted. (Read: What Rajan said on Seventh Pay Commission)

"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," Dr Rajan said in his statement.

"Structural reforms in the forthcoming union budget that boost growth while controlling spending will create more space for monetary policy to support growth."

If the fiscal deficit is kept within reason, then inflation trends over coming months could also favour hopes for lower interest rates.

Oil prices near 13 year lows and seasonally subdued food prices should help bring inflation down to the RBI's target of 5 per cent by March 2017, after it hit a 15-month high of 5.61 per cent in December.

Only two of 39 economists polled by Reuters had expected the RBI would cut rates this time. The rest predicted the policy repo rate would be left unchanged at 6.75 per cent.

But more than half of them saw scope for at least a 25-basis point rate cut by the end of June thanks to the reduced inflationary pressures, with some saying the reduction could come as early as March, before the next scheduled policy review in April.

There is growing impatience with Prime Minister Narendra Modi's government to deliver stronger growth, as vaunted economic reforms keep getting delayed.

The headline growth rate looks very creditable at projected 7.2 per cent for the year ending in March. But private sector investment remains weak, and India needs sustained growth of around 8 per cent to generate jobs for its growing workforce.

Analysts expect India's budget to slightly raise fiscal deficit targets to free up money for investment in infrastructure projects, while keeping subsidies and other spending under control.