Reserve Bank of India

June 7, 2016

The RBI’s repo rate was cut by a total of 150 basis points from 8.0% prior January 2015 to 6.5% — a 5+ year low — at the previous bi-monthly monetary policy review in April.  The size of April’s reduction was 25 basis points.  The reverse repo was also sliced in April and stands at 6.0% after today’s announcement that both rates were left as is.  The 4% reserve requirement ratio also was not changed further.  A statement from Governor Rajan notes that inflation has recently risen more sharply than anticipated at the time of the April rate cut but cites uncertainties to justify not reversing that move.

Incoming data since then show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices. A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures. Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action.  The inflation
projections given in the April policy statement are retained, though with an upside bias. Considerable uncertainty surrounds these projections, which should be clarified by incoming data in the next few months.

On-year inflation of 5.4% in April was somewhat above the central bank’s target for next year.  Economic growth has been robustly above 7.0%.

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



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