Here are the 6 key takeaways from RBI’s monetary policy

RBI Governor Raghuram Rajan maintained status quo and kept the repo rate unchanged at 6.50 per cent and Cash Reserve Ratio (CRR) was also held steady at 4 per cent.

The reverse repo rate was also unchanged at 6 per cent and the marginal standing facility (MSF) was at 7 per cent.

The RBI maintained an accommodative stance in its policy, riding high on forecasts of good monsoons this year.

“I don’t believe in bird analogies of hawkish or dovish, the policy is a realistic assessment of the current situation,” said Rajan.

Rajan said the monsoons are critical for farms are reservoirs levels were plunging.

“Strong monsoons are expected to offset the upward pressure,” said Rajan, adding the inflation data surprised on upside and it was required to see how monsoons playout.

The future CPI path was also somewhat more uncertain.

Here are the takeaways from the policy

Inflation: The Consumer Price Index (CPI) rose sharply than expected due to a more-than seasonal jump in food prices. There was also a firming of inflation relating to edible oils, spices and non-alcoholic beverages. Reflecting these recent inflation dynamics, three-months-ahead inflation expectations of households moved up marginally in May.

Liquidity: The RBI Governor stated he was committed to provide short term rupee liquidity. However, he did not commit to a time frame to move to liquidity neutral situation, saying it will take a long time. Rajan said the central bank will monitor both the dollar and rupee liquidity. “We are ready to contain dollar-rupee volatility on FCNR(B),” said Rajan.

Transmission: The RBI stated that transmission by banks still remained a continuous process. “It is still a work in progress,” said Rajan. The central bank will review the implementation of the Marginal Cost Lending Rate framework by banks.

Clean-up of banks: Rajan said the RBI was working with the government and discussions were going on right capital structure. “We are working with banks and the SEBI on cleaning the banks and the balance sheets. There is no intent to go back to the days of forbearance,” said Rajan.

Strong Monsoons: In its policy statement, RBI stated the demand conditions are likely to improve going forward and consumer confidence was seen as rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon. Rising capacity utilisation should also prompt private investment.

Global markets: RBI stated global financial markets recorded gains. Bond market yields across AEs also eased steadily, reflecting strong appetite in primary auctions in the face of the growing universe of negative yielding bonds. The US dollar continues to mirror changes in expectations of monetary policy action by the Fed. The yen and the euro have remained strong despite ultra-accommodative monetary policies.