India Insight:Rates on hold,we shall miss you Dr Rajan

RBI maintains status quo on rates, in line with our expectations: TheReserve Bank of India (RBI) has kept the repo rate (the rate at which RBIinjects liquidity) unchanged at 6.5% in the policy review today. The CRR wasalso kept unchanged at 4%. Accordingly, the reverse repo and marginalstanding facility (MSF) rate stand at 6% and 7%, respectively. This was in linewith our own and market expectations.

Policy continuity is key: Today was Dr Raghuram Rajan’s last policy reviewas the RBI governor (term ends in first week of Sept 2016). While thegovernment is yet to announce Dr Rajan’s successor, we believeindependence and credibility of the position need to be maintained. The focuson ‘inflation over growth’ and ‘undertaking banking sector reforms’, a taskinitiated by Dr Rajan for effective monetary transmission, will be key.

Considering India will be moving towards the setting up of a monetary policycommittee (MPC) and adopting inflation targeting, this will help lessen theimpact of the choice of an RBI governor on the rate outlook, as decisions willbe driven by a majority vote rather than that of an individual. We maintain ourview that there is scope of further monetary easing by another 25-50bpin FY17.