"Banks have started passing through some of the past rate cuts into their lending rates, headline
However, despite these encouraging signals, what is it that made Rajan stop at a mere 25 basis point cut, when the market at large and all of
We at Business Insider India list for you the 3 major reasons for the Governor’s decision to maintain the cautious stance and not cut rates down by 50 basis points:
1) Some forecasters, notably the
2) Crude prices have been firming amidst considerable volatility, and geo-political risks are ever present.
3) Volatility in the external environment could impact inflation.
4)
5) Level of stressed projects pretty large, will take time to clean up.
6) Corporate results have been very weak
RBI remains cautious
Governor Rajan further stated that while, the central bank will prefer to wait and watch how the current set of rate cuts play out in the
Assuming reasonable food management, inflation is expected to be pulled down by base effects till August but to start rising thereafter to about 6.0 per cent by January 2016 - slightly higher than the projections in April. "Putting more weight on the IMD's monsoon projections than the more optimistic projections of private forecasters as well as accounting for the possible inflationary effects of the increases in the
The bank also said that reflecting the balance of risks and the downward revision to GVA estimates for 2014-15, the projection for output growth for 2015-16 has been marked down from 7.8 per cent in April to 7.6 per cent with a downward bias to reflect the uncertainties surrounding these various risks.
According to RBI, strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near term. "Furthermore, monetary easing can only create the enabling conditions for a fuller government policy thrust that hinges around a step up in public investment in several areas that can also crowd in private investment. This will be important to relieve supply constraints and aid disinflation over the medium term," the bank felt.
"A targeted infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets, is also warranted so that adequate credit flows to the productive sectors as investment picks up," it concluded.