India Monetary Policy


India: Reserve Bank holds repurchase rate

December 1, 2015

In a scheduled meeting on 1 December, the Reserve Bank of India (RBI) decided to hold the repurchase rate at 6.75%. The move was expected by market analysts and followed last meeting’s 50-basis-point cut. 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 is weak and global trade has slowed. In the USA, inventory accumulation is expected to weigh on growth in the final quarter of the year, while the Eurozone economy is expected to pick up pace but remain lackluster. In China, high debt levels and slowing GDP growth continue to stroke concerns, while other emerging market economies continue to face large headwinds.

Regarding India, the Bank stated that preliminary estimates of GVA suggested that the economy accelerated in the second quarter of fiscal year 2015, largely due to a pick-up in industrial production. In addition, value-added in agricultural activities helped offset the effects of a poor south-west monsoon. Meanwhile economic indicators for the service sector remain mixed at the onset of Q4. Commenting on prices, the Bank stated that prices rose in October for the third consecutive month and households’ inflation expectations remain high.

In conclusion, the Central Bank emphasized that it front-loaded its policy action last meeting and, since then, inflation has proceeded as expected. The Bank added that increased public investment spending and the easing stance of monetary policy have supported investment, while the outlook for the agriculture sector remains weak due to the deficient monsoon. As a result, the Bank kept its growth projection for FY 2015 at 7.4%, with a mild downward bias. Looking forward, the Bank added it will monitor developments on commodity prices and track inflation expectations. In addition, the Bank is investigating measures further to ensure the transmission of policy rates into lending rates. The Bank concluded that, it “will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017.” The next monetary policy decision is scheduled for 2 February 2016.

FocusEconomics Consensus Forecast panelists are still taking the Bank’s 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%.

Author: Angela Bouzanis, Senior Economist

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