Reserve Bank of India: No Change in Interest Rates or Bank Reserve Requirements

April 7, 2015

The framework of monetary policy changed in January, with the establishment then of an inflation reduction target to be followed by an inflation containment target once 4% is attained around March 2018.  The targets were endorsed by the government as well as the central bank.  In conjunction with the shift in January, policy was allowed to become more accommodative, and two interest rate reductions, each of 25 basis points, were announced January 15 and March 4.  Neither of those moves were taken at a scheduled bi-monthly policy review.  The first such review of fiscal 2015-16 was just completed and resulted in a statement, which clarifies future policy as a data-driven process:

Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review.

The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years. The Reserve Bank will stay focused on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18. Although the target for end-2017-18 and thereafter is defined in terms of a tolerance band of +/- 2 per cent around the mid-point, it will be the Reserve Bank’s endeavor to keep inflation at or close to this mid-point, with the extended period provided for achieving the mid-point mitigating potentially adverse effects on the economy. As outlined above, several favorable forces are at work, consistent with the change in the monetary policy stance towards accommodation effected from January. The Reserve Bank’s intent is to allow the disinflationary momentum to spread through the economy, but remain vigilant about any resurgence of inflationary pressures that may destabilize the progress towards the inflation objectives set in the Agreement.

The statement describes economic growth as improving and projects CPI inflation, which was at 5.4% in February, as hovering near 5% this quarter, dipping to 4% next quarter, but inclining to 6% by the first quarter of calendar 2016.  The ultimate goal of 4% is to be attained within two years.  For now, with officials in a wait and see mode, the key central bank lending rate (i.e. repo rate) stays at 7.5%.  The reverse repo rate is 6.5%, and reserve requirements are at 4%.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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