4 key reasons Raghuram Rajan didn’t hike rates this time around

RBI Governor Raghuram Rajan on Tuesday kept the repo rate unchanged at 6.75% and CRR also remained same at 4%.

The RBI lowered the rate by 125 basis points this year, including a larger-than-expected 50 bps cut at its last policy review in late September.

But as expected, Rajan maintained status quo and kept the rates unchanged owing to consumer inflation and global markets.

So, here are Rajan’s reasons to keep the rates unchanged

1. Less transmission by banks: Rajan said there was hardly any transmission by banks since January and there was more room for the banks to cut interest rates. The RBI lowered rate by 125 basis points. The Government is examining linking small savings interest rates to market rates. RBI in a statement said such moves should further help transmission of policy rates into lending rates. “Banks are looking to clean-up their balance sheets which will create more room for fresh lending,” said Rajan.

2. Seventh Pay Commission: The central bank wants to assess the implementation of the 7th Pay Commission proposals, and its effect on wages and rents.

3. Consumer Price Index (CPI) picks up: CPI inflation excluding food, fuel, petrol and diesel also rose for three consecutive months on account of price increases in respect of housing, recreation and amusement, and personal care and effects. Rural wage growth, as also corporate staff costs, remain subdued, said Rajan. Rajan said the central bank would follow developments on commodity prices, especially food and oil, and also track inflationary expectations and external developments.

4. Global trade: Global trade has slowed further with waning demand and oversupply in several primary commodities and industrial materials. In China, slowing nominal GDP growth and high debt continue to raise concerns, especially given the over-capacity in certain sectors. Other emerging market economies (EMEs) continue to face headwinds from domestic structural constraints, shrinking trade volumes and depressed commodity price.