6 reasons why RBI Raghuram Rajan maintained status quo

Governor of Reserve Bank of India (RBI) Raghuram Rajan kept the repo rate and CRR unchanged.

Announcing the sixth bi-monthly monetary policy, Rajan said the central bank was still ‘accommodative’ and also looked forward to Union Budget on February 29.

Rajan said the budget needed to support growth and check spending.

"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. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth,” said Rajan.

Rajan said the growth had also slowed due to several reasons including stalled projects and dampened exports. He also said the growth would gain momentum by the end of FY17.

The central bank did not factor in the recommendations of the pay panel.

Here are reasons why the RBI maintained status quo

1. Economic activity: On the domestic front, Indian economic activity lost momentum in Q3 of 2015-16, pulled down by dampened agricultural and industrial growth. In the first two months of Q3 of 2015-16, industrial activity slowed due to weak investment.

2. Weak monsoons: The north-east monsoon season ended in December with a deficiency of 23 per cent relative to the long period average (LPA). Rajan stated that rural incomes would continue to be supported by allied activities such as dairy and horticulture, which now contribute as much to GDP as food grains. “A good monsoon next year could pull the inflation down,” said Rajan.

3. CPI inflation: The CPI inflation rose for the fifth month in December. The CPI inflation, excluding food and fuel, rose for the fourth successive month.

4. Liquidity: The liquidity conditions tightened with advance tax outflows. Rajan said will use all liquidity instruments to ensure sufficient liquidity supply.

5. Exports: Indian exports were in contraction mode for the 13th successive month in December.

6. Global growth: The global growth had slowed. World trade has remained subdued and there were new lows in commodity prices and currency realignments. In the US, an improving labour market continues to support a consumption-led recovery. In the Euro area, core inflation and wage growth were subdued. In China, growth in Q4 of 2015 was the slowest since 2009, pulled down by manufacturing, residential investment and exports. EME commodity exporters confront recessionary conditions, falling currencies, sluggish exports and still high inflation relative to their recent histories.