Reserve Bank of India (RBI) not going by its usual surprise giving style came much in line to the street expectation in its Second Bi-monthly Monetary Policy Statement, 2015-16 and cut its policy rates by 0.25 basis points, making it the third policy easing this year. RBI lowered the repo rate to 7.25 percent from 7.50 percent, consequently the reverse repo rate under the LAF stood adjusted to 6.25 per cent from 6.50 per cent. However, RBI kept the reserve ratios of CRR and SLR unchanged at 4 per cent and 21.5 per cent respectively.
Talks of rate cut had gained momentum over the last couple of weeks and the markets had been anxiously waiting for a rate cut from the RBI. Though, the central bank announced a rate cut but it cautioned that Inflation is expected to rise to 6 per cent by January 2016 and said that strong food policy management is important to keep inflation and inflationary expectations under check in near term. Furthermore, it said that monetary easing can only create the enabling conditions for a fuller government policy thrust that hinges around a step up in public investment in several areas that can also crowd in private investment. This will be important to relieve supply constraints and aid disinflation over the medium term.
Policy stance
On the basis of an assessment of the current and evolving macroeconomic situation, RBI decided to:
reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect;
keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL 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; and
continue with overnight/term variable rate repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.25 per cent.
RBI in its assessment to economy noted that the global recovery is still slow and getting increasingly differentiated across regions. In the United States, the economy shrank in Q1, while the euro area, financial conditions have eased due to the European Central Bank’s (ECB) quantitative easing and a depreciating euro. For most emerging market economies (EMEs), macroeconomic conditions remain challenging due to domestic fragilities, exacerbated by bouts of financial market turbulence. So far as India is concerned, the Central Statistics Office has revised downwards its estimate of India’s gross value added (GVA) at basic prices for 2014-15 by 30 basis points from the advance estimates. Reflecting the balance of risks and the downward revision to GVA estimates for 2014-15, the projection for output growth for 2015-16 has been marked down from 7.8 per cent in April to 7.6 per cent with a downward bias to reflect the uncertainties surrounding these various risks. The apex bank also said that merchandise export growth has weakened steadily since July 2014 and entered into contraction from January 2015 through April, with a recent shrinking of even volumes exported. Net exports are, therefore, unlikely to contribute as much to growth going forward as they did in the past financial year. Consequently growth will depend more on a strengthening of domestic final demand. Though, it added that foreign exchange reserves are around US$ 350 billion, providing a strong second line of defence to good macroeconomic policies if external markets turn significantly volatile.
