India Monetary Policy October 2016

India

India: New policy committee cuts interest rates

The newly facelifted Reserve Bank of India (RBI) decided to ease monetary policy at a scheduled meeting on 4 October, cutting the repurchase rate from 6.50% to 6.25%—an over five-year low. The move surprised market analysts and was the first decision by the recently appointed monetary policy committee, headed by new Central Bank governor Urjit Patel. All six members of the monetary policy committee voted for a rate cut. Accordingly, the Bank also decided to reduce the marginal standing facility rate (Bank Rate) to 6.75% and the reverse repurchase rate to 5.75%.

India’s policy makers have found themselves in a desirable position as the economy is growing robustly, while once elevated price pressures have moderated. In its accompanying statement, the Bank outlined that the decisions are consistent with its accommodative stance and designed to support growth while achieving the inflation target of 5.0% by Q4 FY 2016. The Bank highlighted that the government’s recent measures to cool food inflation have opened up space for monetary policy easing in India.

Regarding growth, the Bank maintained its projection for the economy at 7.6% in FY 2016, with risks evenly distributed around the forecast. The Bank pointed out that a hike in public sector salaries along with the normal monsoon should boost household spending, while private sector firms are benefiting from favorable liquidity conditions and accommodative monetary policy. However, the external sector is expected to remain a sore point in India’s economy as sluggish global trade and smaller terms of trade advantages persist.

Looking forward, the RBI is expected to continue its accommodative stance as price pressure evolve on a favorable path and many of our analysts expect a further easing in monetary conditions. Chetan Ahya, Economist at Morgan Stanley, explains:

“With our forecast of CPI inflation at 4.5-4.7% for QE Mar-17 (lower than RBI's expectation of 5%) and RBI’s lower real rate target of 1.25%, we expect a further 25-50bp of rate cuts by Mar-17. As we expect the incoming inflation readings before the next policy meeting (on Dec 7) to show further moderation and potentially be better than RBI’s expectations, we see a higher possibility that the central bank will move again to cut rates at the Dec 7 meeting.”

Our panelists are still taking the latest developments into account and project that the repurchase rate will average 6.27% at the end of FY 2016. For FY 2017, panelists also see the repurchase rate ending the year at 6.27%.


Sample Report

Looking for forecasts related to Monetary Policy in India? Download a sample report now.

Download

India Monetary Policy Chart


India Monetary Policy October 2016

Note: Marginal Standing Facility (MSF) Rate, Repo Rate and Reverse Repo Rate in %.
Source: Reserve Bank of India (RBI).


India Economic News

More news

Search form