Repo Rate cut not announced by the Reserve Bank Governor…
7th Pay Commission, rising crude may come in way of lower EMIs – RBI policy review RBI monetary policy review: Lack of clarity over implementation of the 7th Pay Commission and rising crude price touching a barrel could be the two main reasons why RBI Governor Raghuram Rajan may not go for a repo rate cut.
Lack of clarity over implementation of the 7th Pay Commission and rising crude price touching $50 a barrel could be the two main reasons why RBI Governor Raghuram Rajan may not go for a repo rate cut in the bi-monthly monetary policy review on Tuesday.
Lowering of repo rate indicates softening of lending rates in the system and consequent lower EMIs on home and car loans for borrowers.
In his April 5 bi-monthly review of monetary policy Raghuram Rajan had clearly indicated that these would be two main issues deciding further rate cuts by RBI since these could have adverse consequences on inflation and growth. And things have not gone the way Rajan would have desired.
In fact, Rajan had clearly stated the adverse impact of crude on inflation and growth, and in this context, had specifically mentioned the figure of $50, the level that it has breached again today. “If oil prices rise to around $50 per barrel, and assuming full pass-through to domestic fuel prices, inflation could be higher by 40-60 bps and growth could be weaker by 20-30 bps,” Rajan had said in the Monetary Policy Report, 2016. Crude was ruling at $40 a barrel at that time of the previous monetary policy review on April 5.
However, if crude prices had softened from then on, Rajan would have had more leeway to cut rates. “Reduction in crude oil prices to around $20 per barrel could reduce inflation by 80-120 bps, while boosting real growth by 40-60 bps,” the report had mentioned.
On the other hand, Raghuram Rajan had also indicated at the likely inflation push caused by the yet-to-be notified 7th Pay Commission award. “The implementation of the 7th Central Pay Commission (CPC) awards can have a significant bearing on the inflation trajectory through both direct and indirect channels.
The direct impact of the 7th CPC recommendations on headline inflation is expected to be around 150 basis points. The indirect effects are estimated to be around 40 basis points,” Rajan had said.
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