Reserve Bank of India Keeps Policy Unchanged after Latest Bi-Monthly Review

August 4, 2015

There had been three cuts earlier this year (January, March and June) of 25 basis points in the repo rate (now 7.25%) and reverse repo (6.25%), but as expected, that didn’t happen again, nor was the 4% bank reserve requirement cut either.  Notably, CPI inflation rose sharply to 5.4%, a 9-month high.  Today’s statement observes continuing uncertainty that may dissipate in a way that allows interest rate cuts later.

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. Short term real risk free rates are nevertheless supportive of borrowing by interest rate sensitive consumer segments such as housing and automobiles. Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation.

The outlook for growth is improving gradually. Favorable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve. On the other hand, global growth projections for 2015 have generally been revised downwards and, therefore, the export contraction could become a prolonged drag on growth going forward. Notwithstanding some improvement in the state of stalled projects, supply constraints continue to be binding and new investment demand emanating from the private sector and the central Government remains subdued. On an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6 per cent.

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



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