RBI Holds Policy Rate Unchanged


The Reserve Bank of India left its benchmark repo rate at 7.25 percent, as expected. Policymakers said they await greater transmission of its monetary easing cycle embarking since January this year and leave possibilities for a more accommodative policies, depending on inflation outlook and possible action from the Federal Reserve.

The central bank also decided to keep the cash reserve at 4.0 percent, to provide liquidity under overnight repos at 0.25 percent and to maintain daily variable rate repos and reverse repos to smooth liquidity.

Excerpts from the statement by Dr. Raghuram G. Rajan, Governor:

In India, the economic recovery is still work in progress. The Reserve Bank’s survey-based indicators point to flat capacity utilisation and new orders, with corporate sales growth declining – although lower inflation explains some of the compression in top lines.  Investment, as measured by new projects, is still weak, primarily because of still-low capacity utilization. In the critically important power sector, where final demand is strong, the recent step-up in generation in response to the commendable easing of bottlenecks in coal supply is being partly negated by structural problems relating to clogging of transmission grids and the dire financial state of electricity distribution companies (DISCOMs).

However, there are signs that consumption demand, especially in urban areas, is picking up. Car sales for July were strong. Nominal bank credit growth is lower than previous years, but adjusted for lower inflation as well as for lower borrowing by oil marketing companies and increased borrowing from commercial paper markets, credit availability seems to be adequate for most sectors.

Liquidity conditions have been very easy in June and July. A seasonal reduction in demand for currency and increased spending by Government coupled with structural factors such as low credit deployment relative to the volume of deposit mobilisation contributed to surplus conditions in the money markets

Headwinds from weak global demand conditions restrained merchandise exports. The contraction in exports in Q1 of 2015-16, both volume and value, was the steepest since Q2 of 2009-10.

Given the 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. Favourable 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 percent.

RBI Holds Policy Rate Unchanged


RBI l Rida Husna l rida@tradingeconomics.com
8/4/2015 7:40:57 AM