RBI holds rates as food prices surge
04 August 2015
The Reserve Bank of India (RBI) has kept the policy repo rate unchanged at 7.25 per cent, deciding against an expected rate cut on the face of a spike in consumer price inflation.
Announcing its bi-monthly monetary policy stance, RBI today said the decision not to reduce rates was taken on the basis of an assessment of the current and evolving macroeconomic situation, including rising food prices.
Accordingly, RBI has kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent and kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of their net demand and time liabilities (NDTL).
RBI said it would continue to provide liquidity under overnight repos at 0.25 per cent of the net demand and time deposits of scheduled banks at the LAF repo rate and liquidity under 14-day term repos, as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions, even as it continues with daily variable rate repos and reverse repos to smooth liquidity.
The reverse repo rate under the LAF will also remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent, RBI said.
The central bank noted that a reduction in demand for currency and increased spending by government coupled with structural factors such as low credit deployment relative to the volume of deposit mobilisation have helped bring enough liquidity in the system in June and July.
However, consumer price inflation rose for the second successive month in June to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations.
Economic recovery in India is still work in progress. After strong rainfall in June, July has been below par, but on the whole, the monsoon is near normal. Reservoir levels also auger well for the prospects of kharif output, particularly for areas that are dependent on irrigation, RBI noted.
The central bank noted that domestic consumption is still weak, but manufacturing activity picked up in July and strengthening exports and corporate profitability could stimulate capital spending in the second half.
Economic activity decelerated in most emerging market economies (EMEs) through the first half of the year due to weak external demand, tightening external financing conditions, deteriorating structural bottlenecks and spillovers from unsettled conditions in financial markets.
RBI cited the example of the Chinese economy, where, despite aggressive policy stimuli, the economy slowed, stock markets slumped and property market cooled and production capacity exceeded in several manufacturing industries.
Taking into account all this, and given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy, RBI said.
Reserve Bank believes there is still room for transmission of its front-loaded past actions. The central bank has reduced the policy rate by a total 75 basis points since January, when it embarked on an easing cycle. RBI said it would monitor developments for emerging room for more accommodation.
The central bank said the outlook for growth is improving gradually. Favourable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve.
However, global growth projections for 2015 have generally been revised downwards and, therefore, the export contraction could become a prolonged drag on growth going forward.
Notwithstanding some improvement in the state of stalled projects, supply constraints continue to be binding and new investment demand emanating from the private sector and the central government remains subdued.
RBI expects output growth for 2015-16 to reach levels around 7.6 per cent on the basis of the evolving balance of risks.