India Monetary Policy February 2016


Reserve Bank holds repurchase rate

In a scheduled meeting on 2 February, the Reserve Bank of India (RBI) decided to hold the repurchase rate at 6.75%. The move was expected by market analysts. In order to maintain the corridor through which monetary policy rates move, the Bank also decided to leave the marginal standing facility rate (Bank rate) at 7.75% and the reverse repurchase rate at 5.75%.

Commenting on the decision, the Central Bank recognized that global growth has slowed and that weak activity in emerging economies is weighing on recovery in some developed countries. In the USA, gains in the labor market are driving a consumption-led recovery; however, exports are declining and manufacturing is sluggish. In the Eurozone, while supportive financing conditions along with an improving labor market are boosting private consumption and business investment, deflation risks, core inflation and wage growth remain subdued. In Asia, exceptional monetary accommodation and fiscal stimulus has failed to boost growth in Japan, while China’s economy has slowed notably.

Regarding India, the Bank stated that the economy lost steam in the third quarter of fiscal year 2015, dragged down by weak agricultural and industrial growth. The monsoon season ended in December, with 23% less rainfall than the long-run average, while service sector economic data point in different directions. In addition, exports continue to decline; however, signs have emerged of a potential bottoming out. Regarding prices, the seasonal decline in prices for fruits and vegetables may contain inflation in the near term; however, prices of cereals and pulses remain elevated. Overall, the Bank added that services inflation has been sticky and household inflation expectations are high.

Looking forward, the Central Bank emphasized that inflation is expected to reach around 5.0% by the end of fiscal year 2016; however, the recommendations of the latest Central Pay Commission have not been taken into account and will likely place upward pressure on prices. The Bank added that it “will adjust the forecast path as and when more clarity emerges on the timing of implementation.”  In addition, the Bank emphasized that the impact of geopolitical events on financial markets and commodity prices as well as the monsoon add uncertainty to the inflation outlook.

In conclusion, the Bank summarized that while the current economic momentum is reasonable, more needs to be done to place the economy on a higher trajectory. Specially, the Bank commented that steady disinflation, a modest current account deficit and fiscal discipline should be priorities to boost growth. Against this backdrop, the Bank stated that it “continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation.” In addition, the Bank took a wait-and-see approach, adding that structural reforms in the upcoming budget that support growth while limiting spending will create more space for monetary policy. The next monetary policy decision is scheduled for 5 April 2016.

FocusEconomics Consensus Forecast panelists project that the repurchase rate will average 6.71% at the end of FY 2015. For FY 2016, panelists see the repurchase rate ending the year at 6.47%.

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India Monetary Policy Chart

India Monetary Policy February 2016 1

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

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