RBI keeps rates unchanged

Repo rate is the rate at which banks borrow funds from the central bank. File photo   | Photo Credit: DANISH SIDDIQUI

The Reserve Bank of India (RBI), on Tuesday, kept the short-term policy rate (repo) unchanged at 7.50 per cent.

With the banks not transmitting to customers its earlier unscheduled 50 basis points cut in twin-doses, the Reserve Bank has now decided to await ‘more convincing data’ on inflationary pressures.

Repo rate is the rate at which banks borrow funds from the central bank.

“Transmission of policy rates to lending rates has not taken place so far despite weak credit offtake and the front-loading of two rate cuts,” said RBI Governor Dr. Raghuram Rajan in his first bi-monthly Monetary Policy Statement for 2015-16.

“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,” Dr. Rajan added.

In an effort to bolster economic growth, the central bank had cut rates twice, by 25 basis points each, outside the regular policy reviews. However, only a very few banks passed on the benefits through reduction of their lending rates.

“The outlook for growth is improving gradually,” said Dr. Rajan, adding, “Comfortable liquidity conditions should enable banks transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy.”

He also said the Monetary Policy Framework Agreement signed by the Government of India and the RBI in February 2015 would shape the stance of Monetary Policy in 2015-16 and succeeding years.

RBI said that it would stay focussed on ensuring that the economy dis-inflated ‘gradually and durably,’ with retail inflation measured by consumer price index (CPI) 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 RBI’s endeavour 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,” he said.

Dr. Rajan said that uncertainty surrounding the arrival and distribution of the monsoon and unanticipated global developments were the two major risks to baseline growth projections.

GDP growth estimates of the Central Statistical Organisation (CSO) for 2014-15 already projected a robust pick-up, “but leading and coincident indicators suggest a downward revision of these estimates when fuller information on real activity for the last quarter becomes available,” he said.

Assuming a normal monsoon and no major structural change or supply shocks, the RBI said: “output growth for 2015-16 is projected at 7.8 per cent, higher by 30 basis points from 7.5 per cent in 2014-15, but with a downward bias to reflect the still subdued indicators of economic activity.”

Going forward, the central bank said the ‘accommodative stance’ of monetary policy would be maintained. The monetary policy actions would, however, be conditioned by incoming data, it added.

First, the RBI would await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates. Second, developments in sectoral prices, especially those of food, would be monitored, as would be the effects of recent weather disturbances and the likely strength of the monsoon.

Finally, the Reserve Bank would watch for signs of normalisation of the U.S. monetary policy.

1. ‘Accommodative stance’ of monetary policy will be maintained

2. The outlook for growth is improving gradually

3. Output growth for 2015-16 is projected at 7.8 per cent

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Printable version | Jul 28, 2021 5:12:40 PM |

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