RBI keeps rates intact amid fear of inflation spike

Economy truly in recovery mode, says Rajan; banks told to pass on benefit of earlier cuts to borrowers

The Reserve Bank on Tuesday flagged concerns on a spike in non-food prices inflation, chiefly in education and health services, as it kept key rates, repo and reverse repo, unchanged. RBI governor Raghuram Rajan, saying the economy is “truly in a recovery mode”, urged banks to pass on the benefit of earlier cuts to borrowers, saying more cuts were possible as lenders had only passed on less than half the 1.25 per cent cuts announced in 2015.

In its fifth bi-monthly monetary policy statement, the RBI said CPI inflation excluding food, fuel, petrol and diesel also rose three consecutive months due to hikes in housing, recreation and personal care effects. Education and health services contributed most to headline inflation.

Households’ inflation expectations are still high, but have edged lower recently, perhaps in response to lower petrol and diesel prices. “Services inflation is obviously a source of concern,” said Dr Rajan.

Experts said any further movement of rates by RBI will depend on the much-awaited December 16 decision by the US Federal Reserve, that is widely expected to begin a rate-hike cycle.