India Monetary Policy


Reserve Bank holds interest rates unchanged

In a scheduled meeting on 4 August, the Reserve Bank of India (RBI) decided to maintain the repurchase rate at 7.25%. The move was largely expected by market analysts and followed last meeting’s rate cut. In order to maintain the corridor through which monetary policy rates move, the Bank also decided to maintain the marginal standing facility rate (Bank rate) at 8.25% and the reverse repurchase rate at 6.25%.

Commenting on the decision, the Central Bank recognized that the global economy moderately recovered in the April to June period of 2015, supported by private consumption in both the USA and Eurozone. However, domestic demand remains weak in Japan and China’s economy is slowing. In addition, global financial markets have experienced high levels of volatility in recent months due to the Greek debt crisis and the Chinese stock market slump and currency markets have been dominated by an appreciating USD.

Regarding India, the Bank commented that recovery is underway, however still a “work in progress.” This year’s monsoon is close to normal following strong rainfall in June and moderate rainfall in July. The Bank added that if harvest prospects improve, this should support rural demand and facilitate economic growth going forward. However, the Bank recognized that exports have fallen in certain industries, partly due to weak external demand. Yet, growth prospects are improving gradually. Rising real incomes should support consumption, however subdued global demand may weigh on the external sector.

Commenting on prices, the Bank stated that inflation has evolved according to projections for the most part, despite rising unexpectedly in June. However, the balance of risks is troublesome, especially regarding prices for food and fuel. Food prices have risen steeply in recent months and may place upward pressures on prices going forward. However, lower prices for fuel and a near-normal monsoon should help mitigate this risk.

In conclusion, the Central Bank summarized that the accommodative monetary policy stance seen in the last two meetings will be kept going forward. However, at this time it is prudent to hold the policy rate unchanged since last meeting’s cut was front-loaded. Moreover, the Central Bank added that it is waiting for domestic banks to pass on last meeting’s cut. The Bank added that, “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.”

FocusEconomics Consensus Forecast panelists are still taking these developments into account and project that the repurchase rate will average 7.06% at the end of FY 2015/2016. For FY 2016/2017, panelists see the repurchase rate ending the year at 6.90%.

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India Monetary Policy Chart

India Monetary Policy August 2015

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

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