RBI decides not to cut rates; here's why

RBI Governor Raghuram Rajan has announced to keep key policy rates unchanged in the second bi-monthly monetary policy meet held on Tuesday. 

The central bank has kept the repo rate unchanged at 6.5%, down from 8.75% in January last year. 

The repo rate is the rate which bank borrows from the Reserve Bank of India (RBI). 

Reserve Bank of India (RBI) has also unchanged the cash reserve ratio (CRR) of scheduled banks at 4% of net demand and time liablities (NDTL).  

Similarly,  the reverse report rate has remain unchanged at 6% and the marginal standing facility (MSF) rate and the Bank Rate at 7%. 

The central bank had reduced the rate by 25 basis points on April 5 this year. 

Why the central bank has decided not to cut rates?  

1. The global growth is uneven and struggling to gain traction. World trade remains muted in an environment of weak demand. In the United States, growth was slow once again in the first quarter (Q1) because of contracting industrial activity and exports. Recent indicators of labour market activity have also weakened. 

2. The index of industrial production decelerated in 2015-16, mainly pulled down by weak manufacturing in an environment of subdued investment demand and weak rural consumption. 

3. The ebbing of inflation pressures for two consecutive months to March, after a period of steady rise, was interrupted once again in April, driven by prices of petrol and diesel. 

4. Despite the waning of liquidity pressures in early April, stronger-than-usual currency demand during the first two months of the financial year and build-up of cash balances by the Government from the second week of May tightened liquidity conditions from mid-May. 

5. India's exports declined for the seventeenth consecutive month in April in the US dollar terms in spite of a modest increase in volume. The fall in crude oil prices led to lower export realisations from petroleum products (POL), although the volume of shipments of petroleum products is estimated to have picked up modestly.

Rising inflation, lower crude oil prices, weak investment and demand have been key concerns for RBI which prompted it to maintain status quo.

The central bank will closely watch the impact of delayed monsoon before it takes further rate cut decision.

It will announce its third bi-monthly monetary policy meet on August 9, 2016.