Much on the expected lines the Reserve Bank of India (RBI) in its Third Bi-monthly Monetary Policy Review, 2015-16, kept the repo rate, at which it lends to the system, unchanged at 7.25% and the cash reserve ratio, which is the proportion of deposits banks have to park with the central bank, at 4%, but it said that persistently low oil prices globally and government's proactive measures to rein in inflationary pressures were working well to control price rise, giving a ray of hope for a rate cut before the year end. RBI also pointed out that significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, full monsoon out-turn, as well as possible Federal Reserve actions.
In its monetary policy stance, based an assessment of the current and evolving macroeconomic situation RBI decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent; keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (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 daily variable rate repos and reverse repos to smooth liquidity.
RBI though said that relative to the projections in the June policy, “inflation projections in this bi-monthly statement are elevated by the higher-than-expected June observation but reduced by prospects of softer crude prices and a near-normal monsoon thus far.” “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 also lowered it consumer price inflation forecast for January-March 2016 by 0.2 percentage point.
The apex 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 H2. It added that in India, the economic recovery is still work in progress. After strong rainfall in June, July has been below par, but on net, the monsoon is near normal. Higher reservoir levels also auger well for the prospects of kharif output, particularly for areas that are dependent on irrigation. Reserve Bank’s survey-based indicators point to flat capacity utilisation and new orders, with corporate sales growth declining – although lower inflation explains some of the compression in top lines. It said that, although overall business confidence is positive, the level of optimism was a shade lower in April-June than in the preceding quarter. Investment, as measured by new projects, is still weak, primarily because of still-low capacity utilization.
RBI also pointed that since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far. As loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place. It added that 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.
With the accommodative stance statement, RBI governor hinted that the central bank may cut interest rates before the next policy announcement on September 29, depending upon macroeconomic indicators. RBI will get another set of WPI, CPI inflation data for August and IIP numbers for July in September to firm up its view on interest rates before the fourth bi-monthly monetary policy review on September 29.
