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RBI Governor Raghuram Rajan widely expected to maitain status quo

RBI Governor Raghuram Rajan is widely expected to hold the key interest rate in his last monetary policy review on Tuesday as retail inflation continues to be above the comfort zone.  Rajan, whose 3-year term will come to an end on September 4, may prefer that RBI assesses the full impact of monsoon before taking a view on the interest rate. This is going to be the last bi-monthly monetary policy to be decided by the central bank Governor as the broad-based 6-member panel may take over the job before the next review on October 4. In conjunction with naming its 3 members on the Monetary Policy Committee, the government is also likely to name a successor to Rajan sometime this month.

The govt announced last week that it would like the RBI to focus on maintaining retail inflation rate of 4% for the next five years, based on which the new interest rate setting panel would take its monetary policy decisions going forward. The move, which provides for a margin of plus or minus 2% in this target thus fixing the upper tolerance level at 6% till 2021, is being seen as government putting the seal on Rajan’s inflation-first model of monetary policy. “We are expecting that there will be no change in rate because vegetable prices are on the rise… It will take a few months for the vegetable prices to come down when the kharif crops come into the market,” SBI Chairperson Arundhati Bhattacharya said.  Consumer Price Index based retail inflation rose by 5.77%  in June, the fastest pace in 22 months and it is expected that the implementation of the new Goods and Services Tax (GST) may push it up further.

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