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Here are 6 key takeaways from Raghuram Rajan’s ultimate policy review

Aug 9, 2016, 12:02 IST
RBI’s outgoing Governor Raghuram Rajan kept the repo rate unchanged at 6.50 per cent and even the Cash Reserve Ratio (CRR) was not moved at 4 per cent.
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The Reserve Bank of India (RBI) took an accommodative stance but was hawkish on inflation. The uptick in inflation was due to rising prices of vegetables, fruits and pulses.

The retail inflation measured by the Consumer Price Index (CPI) rose to nearly two-year high in June, driven by increase in food and vegetable prices.

READ ALSO: RBI’s outgoing Governor Raghuram Rajan holds interest rates at 6.50% in his last policy review

This is the last monetary policy of Rajan, whose term expires on September and will be taking up academia in the US.

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In his last policy review, Rajan spoke about liquidity, non-performing assets, GST inflation etc.

Here are the main takeaways from Rajan’s last monetary policy

Inflation: The RBI statement read that the recent sharper-than-anticipated increase in food prices pushed up the projected trajectory of inflation over the rest of the year. Moreover, prices of pulses and cereals are rising and services inflation remains somewhat sticky. But, indication are there of them edging down. “Impact of good monsoons will also be helpful,” said Rajan.

Seventh Pay Commission: The implementation of the 7th Pay Commission recommendations will affect the magnitude of the direct effect of house rents on the CPI. The CPI risks will be tilted to the upside.

Goods and Services Tax (GST): The RBI stated the passage of the GST Bill augurs well for growing political consensus for economic reforms. “While timely implementation of GST will be challenging, there is no doubt that it should raise returns to investment across much of the economy,” said Rajan.

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Momentum of growth: RBI stated the momentum of growth is expected to be quickened by the normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to consumption spending that can be expected from the disbursement of pay, pension and arrears following the implementation of the 7th Pay Panel.

Non-Performing Assets: Rajan said the RBI was comfortable with the way banks were taking up the issue. He said banks know what to do and RBI has many schemes for NPAs. It all depends on the banking system and Rajan said they are doing their bit.

Rate transmission: Rajan said once there is liquidity, banks will pass on the rate cuts. Rajan said banks will also have to clean up bad debts to pass on the rate efficiently
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