Reserve Bank of India Leaves Monetary Policy Settings Unchanged

February 2, 2016

The key RBI repo rate of 6.75% as well as the 5.75% reverse repo rate and 4.0% reserve requirement were not cut further after the first central bank policy meeting of 2016. No changes had been anticipated, and none occurred at the prior meeting in December.  A statement from officials runs down the litany of present global strains:  financial market turbulence, the onset of rising Federal Reserve interest rates, subdued world trade, lower prices for oil and other commodities, China’s poorly managed slowdown and heavy outflow of capital, and weak growth with excessively low inflation in Europe.  India’s situation is portrayed as reasonably good and doesn’t rule out a further interest rate cut.

The current momentum of growth is reasonable, though below what should be expected over the medium term. Underlying growth drivers need to be rekindled to place the economy durably on a higher growth trajectory. The revival of private investment, in particular, has a crucial role, especially as the climate for business improves and fiscal policy continues to consolidate. The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened. The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17.

From an end-2014 level of 8.0%, the repo rate last year was cut by 25 basis points each in January, March and June and then by 50 basis points in September to the current 6.75% level.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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