The central bank said, “given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy...Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation”.
Headline consumer price index (CPI) inflation rose for the second successive month in June 2015 to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations. The sharp month-on-month increase in food and non-food items overwhelmed the sizable ‘base effect’ in that month,” the RBI said.
During 2015-16 so far, inflation conditions have evolved around the path projected in April and June bi-monthly policy statements, though they surprised somewhat on the upside in June. Large base effects, which the Reserve Bank will look through, are expected to pull down headline inflation in July and August. From September, favourable base effects wane,” it said.
The story of WPI inflation is however different from CPI. The headline inflation has been on the downward spiral, as it declined for the eighth consecutive month at - 2.40 per cent in June.
After strong rainfall in June, July has been below par, but on net, the monsoon is near normal,” the central bank noted.
Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far. As loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place,” the central bank said. It added, “The welcome announcement by Government of infusion of bank capital into public sector banks will help loan growth and hence transmission, as will currently easy liquidity conditions".
Most brokerages and banks had pegged the interest rates to remain on hold.