India Monetary Policy

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India: Central Bank leaves monetary policy rate on hold, sees seasonal inflationary pressures

June 3, 2014

At its 3 June monetary policy meeting, the Reserve Bank of India (RBI) decided to leave the repurchase rate unchanged at 8.00%, which was in line with market expectations. In addition, the Bank left the reverse repo rate at 7.00% and the marginal standing facility rate at 9.00%.

The RBI stated that global GDP growth is following different paths, but remarked that the UK and the U.S. economies are gaining traction, which bodes well for the Indian economy. At the domestic level, the RBI acknowledged that most indicators point to “continuing sluggishness” in economic activity in the first quarter of FY 2014/15. The Bank said that the Indian economy is likely to be affected by the monsoon in the following months, especially in the agricultural sector. However, it also stated that the decisive election results (Narendra Modi won by a landslide) are expected to, “create a conducive environment for comprehensive policy actions and a revival in aggregate demand, as well as a gradual recovery of growth during the course of the year.”

The Bank acknowledged that food prices measured by the CPI were higher in April, which is continuing to keep inflation at high levels, although, “CPI inflation excluding food and fuel has moderated gradually since September 2013.” The Bank sees inflation rising in the coming months, but it mainly attributed that to seasonal factors. Therefore, the Bank still sees inflation moderating over the course of the next quarters. Thus the RBI said that, “it is appropriate to leave the policy rate unchanged, and to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy.” That said, the expected effects of the delayed monsoon, along with the impact that a hurricane caused by El Niño could have, are likely to pose a risk to the Bank’s inflation forecast for 2015. The RBI reiterated that it remains committed to lowering inflation to 8.0% by January 2015 and to 6.0% by January 2016. The next monetary policy meeting will be held on 5 August.

FocusEconomics panelists project that the repurchase rate will average 7.58% at the end of FY 2014/2015. For FY 2015/2016, panelists see the repurchase rate ending at 7.44%.


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India Monetary Policy June 2014 0

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


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