There is also no change in CRR (cash reserve ratio) of commercial banks at 4 per cent of their net demand and time liabilities while all other rates remain the same including reverse repo rate at 6.25 per cent and MSF and Bank Rate at 8.25 per cent..

Governor Raghuram Rajan hopes a good monsoon outturn, abatement of persisting inflationary pressures (non-fuel), clearing of uncertainty on US Fed Reserve actions, along with greater transmission of the front-loaded past actions, would create space for more accommodation. In his view, such 'significant uncertainty' would be resolved in the coming months. The next Monetary Policy Review is due on September 29, 2015.

Meanwhile, taking into account all factors including likely greater transmission of the 75 basis points cuts so far, “it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance”. Short term real risk free rates are nevertheless supportive of borrowing by consumer segments such as housing and automobiles, he said.

Dr Rajan's statement makes a major difference to the Government perception that conditions are ripe now for an interest rate cut. The monsoon uncertainty has not been cleared as yet and there are again forecasts of below normal rains in August-September. As for inflation, Dr Rajan refers to rise in CPI for second successive month in June to a nine-month high to 5.4 per cent, on the back of a 'broad based increase in upside pressures'

Not only food inflation had risen 60 basis points driven by spike in prices of vegetables and protein items but also the momentum of price increases remained high for other categories in CPI excluding food, fuel, petrol and diesel, since April. Near-term inflation expectations of households returned to double digits after two quarters, the RBI review noted.

The Governor has, however, not altered the inflation and growth projections for the current year, as indicated in June 2 statement. While inflation is elevated by a higher projection than expected in June, softer crude prices and near-normal monsoon thus far have lowered the projection for January-March 2016 by about 0.2 per cent, with risks broadly balanced around the target of 6.0 per cent for January 2016.

While retaining the growth estimate at 7.6 per cent for the current fiscal, RBI review points out that economic recovery is still a work in progress and growth outlook is improving gradually. Favourable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve.

But the lowered global GDP projections would result in export contraction for our economy becoming a prolonged drag on growth. Also, notwithstanding some improvement in the state of stalled projects, according to RBI, supply constraints continue to be binding and new investment demand emanating from the private sector and the central Government remains 'subdued.

In the evolving balance of risks, output growth for 2015-16 has been retained at 7.6 per cent'. The Reserve Bank’s survey-based indicators point to flat capacity utilisation and new orders, with corporate sales growth declining – although lower inflation explains some of the compression in top lines.

While overall business confidence is positive, the level of optimism was 'a shade lower' in April-June than in the preceding quarter. Investment, as measured by new projects, is still weak, primarily because of still-low capacity utilization, according to RBI. In the vital power sector, with strong demand, recent step-up in generation in response to the commendable easing of bottlenecks in coal supply is being partly negated by structural problems relating to clogging of transmission grids and the dire financial state of electricity distribution companies (DISCOMs).

The key policy rate of repo had been lowered thrice from 8 per cent till 2014 to 7.25 per cent by June 2015, totalling 75 basis points in the first six months of 2015. But, the Governor said, the median base lending rates of banks has fallen only by around 30 basis points, a fraction of the 75 basis points in rate cuts so far.

The expectation is that as demand picks up in third quarter of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place. In this context, Dr Rajan has welcomed the Government announcement on infusion of bank capital into public sector banks. This would help loan growth and hence transmission, as would 'currently easy liquidity conditions', he noted..

Dr Rajan said RBI would be carefully monitoring developments for 'emerging room for accommodation'. He also referred to earlier bi-monthly statements which indicated that the accommodative stance of monetary policy would be maintained going forward, but monetary policy actions will be conditioned by a set of factors.

One of that is fuller transmission by banks of the Reserve Bank’s front-loaded rate reductions into their lending rates. 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, it is expected, banks will see more gains from cutting rates to secure new lending, and more transmission will take place to facilitate adequate credit flows to the productive sectors, as investment picks up.

On the external side, despite the contraction in exports in the first quarter, the steepest since 2009, the sharp fall in international commodity prices - especially crude oil - compressed import payments, helping to narrow the trade deficit. With sustained portfolio flows and other forms of foreign capital flows (FDI and NRI deposits) and shrinking external financing requirement, reserves were built up to an all-time high at the end of June (some 350 billion dollars), providing a buffer against adverse global shocks, the review said. (IPA Service)