Reserve Bank of India

December 1, 2015

Monetary policy was not changed at this week’s review.  The repo and reverse repos remain at 6.75% and 5.75%.  Policy easing was front-loaded earlier this year, with cuts of 25 basis points in January, May and June, followed with a greater-than-anticipated 50 bps in September.  A released statement makes these points:

  • Front-loaded monetary support was provided “in response to weak domestic and global demand that were holding back investment, while noting that structural reforms and productivity improvements would continue to provide the main impetus for sustainable growth.”
  • “inflation has turned up as anticipated, and is expected to rise further until December before plateauing. …and is expected to broadly follow the path set out in the September review with risks slightly to the downside.”
  • “Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks. The median base lending rate has declined only by 60 bps. The Reserve Bank will shortly finalize the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to.”
  • “Following the early November release of robust US jobs data which increased the likelihood of US monetary policy starting to normalize in December, the US dollar has appreciated significantly, and US yields have hardened. Bond markets in EMEs have generally been tracking the hardening of US yields. Currency markets in EMEs have experienced selling pressures as portfolio investors continue to exit them as an asset class. Unease in investor sentiment is likely to increase ahead of the imminent divergence in advanced economy monetary policy stances.”

Uncertainty regarding the global financial market aftermath of a hike in the U.S. federal funds rate hike appears to have been a restraining factor this month on any temptation to cut the central bank rates further at this time.  But the evolving inflation outlook will be the main policy determinant going forward.

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

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