India: Reserve Bank holds interest rates steady after surprising cut
February 3, 2015
In a scheduled meeting on 3 February, the Reserve Bank of India (RBI) decided to leave the repurchase rate unchanged at 7.75%. The move was expected by market analysts and followed the Bank’s surprise decision to cut the repurchase rate at an unscheduled meeting on 15 January. In order to maintain the corridor at which monetary policy rates move, the Bank also decided to leave the marginal standing facility rate (Bank rate) unchanged at 8.75% and the reverse repurchase rate unchanged at 6.75%. However, the Bank did reduce the statutory liquidity ratio (SLR) by 50 basis points from 22.0% to 21.5% effective on 7 February.
Commenting on the decision, the Central Bank recognized that inflation pressures have been relatively consistent with the Bank’s assessment. While inflation fell faster than the Bank anticipated during June-November, the acceleration in December was relatively muted compared to projections. The monetary authorities explained that lower-than-expected inflation stemmed from a sharp decrease in global commodity prices as well as subdued rural wage growth. As a result, the Bank decided to cut the policy rate in January. Since there have been no substantial new developments on the fiscal outlook or disinflationary process since the previous monetary policy meeting, the Bank decided it was appropriate to maintain the current interest rate stance.
Regarding inflation expectations, the Central Bank pointed out that inflation is likely to reach the Bank’s target of 6% by January 2016. The RBI stated that possible upside risks include, “the unlikely possibility of significant fiscal slippage […] [and] the low probability but highly influential risks of reversal of international crude prices due to geo-political events.” In addition, the RBI stated that it will closely monitor the revision in the CPI, which will change the base year of the index to 2012 and include a more representative consumption basket. The first scheduled monetary policy meeting for fiscal year 2015-16 will take place on 7 April.