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Market verdict Rajan to hold interest rate

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Market players see no change in CRR either, expect RBI to wait for Fed move
Bankers, economists and market participants expect the Reserve Bank of India ( RBI) to maintain status quo in its fifth bi- monthly policy review for 2015- 16, scheduled on December 1. All 12 participants in a BS poll said RBI Governor Raghuram Rajan would be in no mood to tinker with the interest rate or even the cash reserve ratio. He would ideally wait to see the impact of a possible rate hike by the US Federal Reserve on December 15- 16, possibly the first by the world’s largest economy since June 2006.
RBI has, since January this year, cut its policy rate four times to bring it down from eight per cent to 6.75 per cent. In the fourth monetary policy review on September 29, the central bank surprised the market by a 50 basis point ( bps) cut. One bps is a hundredth of a percentage point. The repo is the rate at which the RBI lends to banks.
In his monetary policy statement, Rajan said the central bank’s stance would continue to be accommodative but the focus of monetary action for the near term would “ shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 bps cut in the policy rate are removed”.
RBI, he said, would continue to be vigilant to keep theeconomyonitstargetdisinflationary path. RBI’s target of six per cent retail inflation by January 2016 is achievable although prices of food, especially of pulses, remain elevated.
Prices of pulses pushed consumer price index- based inflation to a four- month high of five per cent in October and Rajan recently cautioned the challenge was to avoid a wage- price spiral.
“We are not really targeting that first round effect on food; we are worried about the second round effect on wages and are trying to make sure that is contained. Unfortunately, that sometimes means slower activity,” Rajan said on November 20, at an event in Hong Kong.
Business Standard, New Delhi, 26th Nov. 2015

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