India Monetary Policy


Reserve Bank cuts repurchase rate

In a scheduled meeting on 29 September, the Reserve Bank of India (RBI) decided to cut the repurchase rate from 7.25% to 6.75%. The move was largely unexpected by market analysts, who had expected a smaller 25-basis-point cut, and followed last meeting’s decision to hold rates. In order to maintain the corridor through which monetary policy rates move, the Bank also decided to reduce the marginal standing facility rate (Bank rate) to 7.75% and the reverse repurchase rate to 5.75%.

Commenting on the decision, the Central Bank recognized that global growth has slowed, particularly in emerging countries. In addition, global trade has moderated and downside risks to the global economy have risen. While private consumption has supported growth in the USA, investment in the energy sector has slowed and exports fallen. In the Eurozone, economic recovery continues, however growth in Japan is faltering. The Bank emphasized that, meanwhile, emerging market economies have been caught in an economic trap of depressed global trade, weak currencies and low prices for commodities, which is adding to issues in domestic economies. In addition, the Bank commented that since China devalued its currency equities, commodities and currencies have fallen notably and financial conditions have yet to stabilize.

Regarding India, the Bank stated that recovery is underway, albeit tentatively. The southwest monsoon has been below average but greater supplies of fertilizers and other measures should limit the effects. The Bank added that signs are emerging of a pick-up in private consumption; however, external conditions have deteriorated recently. Commenting on prices, the Bank stated that tepid domestic demand is limiting output price growth and input prices have fallen lately. Moreover, inflation fell in August to its lowest level since November 2014, in part due to favorable base effects and slower increases in prices.

In conclusion, the Central Bank summarized that given weakening global demand and abating inflationary pressures, the Reserve Bank decided to front-load policy action. The Bank also announced that it would target inflation of 5.0% by the end of FY 2016. Looking forward, the Bank emphasized that while monetary policy will remain accommodative, the near-term goals of the Bank are to work “with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.” The Bank added that it will “continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the target disinflationary path.”

FocusEconomics Consensus Forecast panelists are still taking these developments into account and project that the repurchase rate will average 6.97% at the end of FY 2015. For FY 2016, panelists see the repurchase rate ending the year at 6.83%.

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India Monetary Policy Chart

India Monetary Policy September 2015

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

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