04.08.215  

RBI keeps Policy Rates Unchanged

 Key points

•         Inflation projections for Jan-March 2016 lower by 0.2%
•          Large base effects to pull down inflation in July-August
•          FY 16 growth projection retained at 7.6%
•          Monsoons have been near-normal so far
•          Sustained hardening of inflation excluding food and fuel 

The Reserve Bank of India (RBI) held its policy rate at 7.25 percent on Tuesday, pausing as widely expected after a spike in food prices sent consumer inflation to an eight-month high. The Reserve Bank of India (RBI) left interest rates unchanged at its monetary policy review on Tuesday, even as the central bank said that the policy stance remains accommodative. The decision was in line with expectations. Following Tuesday’s policy, RBI’s benchmark repo rate stands at 7.25%. Rates have been reduced by 75 basis points since the start of 2015. One basis point is one-hundredth of a percentage point. The cash reserve ratio (CRR) was left unchanged at 4% and the statutory liquidity ratio (SLR) was also maintained at 21.5%. In its policy statement, RBI noted that relative to the projections in the June policy, inflation projections in this bi-monthly statement are elevated by the higher-than-expected June observation but reduced by prospects of softer crude prices and a near-normal monsoon thus far. Taking into account all this, and given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” said RBI. RBI also lowered it consumer price inflation forecast for January-March 2016 by 0.2 percentage point. The central bank further added that it awaits greater transmission of its front-loaded past actions, adding that it will monitor developments for emerging room for more accommodation. 

The central bank, however, retained its growth forecast of 7.6% for the financial year ending March 2016, citing a gradually improving outlook on the back of better real income from the decline in commodity prices and likelihood of better agricultural income if the monsoon continues to improve. However, it cautioned that given the downward revision of global growth projections, exports could be a drag on India's economic growth. Also, it pointed out that supply constraints continue to be binding and new investment demand emanating from the private sector and the central Government remains subdued. 

Part of the reason, of course, is that banks themselves are struggling to contain their basket of non-performing assests. For their part, industry has been complaining about the large debt burden it is saddled with. Indebted Indian companies, especially the mid-sized and smaller ones, argue that the central bank should take comfort in the fall in wholesale price inflation for an unprecedented eight months and cut interest rates further.

The RBI's next policy review is set for Sept. 29. That would be after the Fed's September meeting, and any increase in US rates is expected to suck money out of emerging markets.