7 Takeaways From Rajan's Last Credit Policy

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It was a status quo policy that was announced by RBI Governor Raghuram Rajan, at today's Monetary Policy Review. However, there were a few takeaways that we must emphasize. Here are 7 of them:

1) RBI keeps interest rates steady

The RBI kept interest rates steady and did not cut them. Technically, they are called repo rates or interest rates at which the RBI lends money to banks.

It was kept steady at 6.50 per cent with no change.

When repo rates are hiked, interest rates in the economy go up and when they fall, interest rates fall.

So, loan interest rates may not go up, neither will bank deposit interest rates fall.

2) Cash reserve ratio also unchanged

The cash reserve ratio or the amount of deposits that banks have to keep with the RBI was also kept steady.

Normally, this is cut to boost liquidity or increased to reduce liquidity in the system.

3) Last bi-monthly to be decided by Governor

This was also the last bi-monthly monetary policy to be decided by the RBI Governor as the broad-based 6-member panel may take over the job before the next review on October 4.

So, the next time there is going to be a panel to review interest rates.

4) Governor Rajan's last Monetary policy

This was the last Monetary Policy of the current Reserve Bank of India governor, Raghuram Rajan.

His term expires on Sept 3, 2016. There is no successor that has been announced as yet.

5) Worries over inflation

The RBI is worried over inflation and rightly so. What this means is that if retail inflation remains at elevated levels, there maybe no more interest rate cuts.

"Retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June, with a sharp pick-up in momentum overwhelming favourable base effects. The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year," the RBI has said.

 

6) Inflation from 7th Pay Commission

The RBI is also worried of Inflation creeping from the 7th Pay Commission.

"In addition, the full implementation of the recommendations of the 7th central pay commission (CPC) on allowances will affect the magnitude of the direct effect of house rents on the CPI. On balance, inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017," the RBI has said.

7) GST Passage – A positive

"The passage of the Goods and Services Tax (GST) Bill augurs well for the growing political consensus for economic reforms.

While timely implementation of GST will be challenging," the Central Bank has noted.

Read more about: monetary policy, raghuram rajan
Story first published: Tuesday, August 9, 2016, 12:16 [IST]
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