In line with general expectations, Reserve Bank of India (RBI) Governor Raghurma Rajan in the fifth Bi-Monthly Monetary Policy review, 2014-15, kept the key policy rates unchanged. The policy repo rate under the liquidity adjustment facility (LAF) was kept unchanged at 8.0 per cent; similarly the cash reserve ratio (CRR) of scheduled banks was kept unchanged at 4.0 per cent of net demand and time liabilities (NDTL). Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate will stand at 9.0 per cent.
Further RBI will continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and continue with daily one-day term repos and reverse repos to smooth liquidity.
Assessing the global economy, the policy stated that since last bi-monthly monetary policy announcements the global economy has slowed, though the recent sharp fall in crude prices will have a net positive impact on global growth. On domestic front, after a weak Q2 the economic activity is likely to be muted in Q3 because of a moderate kharif harvest. The fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets. The central bank has also kept growth target for the current fiscal unchanged at 5.5 percent.
The policy statement further stated that retail inflation, though has decelerated sharply since the fourth bi-monthly statement of September but over the next 12-month period is expected to retain some momentum and hover around 6 per cent, except for seasonal movements, as the disinflation momentum works through. Inflation has been receding steadily and current readings are below the January 2015 target of 8 per cent as well as the January 2016 target of 6 per cent. However, favourable base effect that is driving down headline inflation will likely dissipate and inflation for December may well rise above current levels.
RBI Governor Raghuram Rajan putting a halt to the hopes of rate cut has stated that “Change in monetary policy stance at the current juncture is premature,” though he also said that he will not hold rates for longer than needed, hinting at lowering policy rate early next year if current trend in fiscal developments and disinflationary pressure continue.