Going on expected lines, Reserve Bank of India (RBI) in its fifth Bi-monthly Monetary Policy Review, 2015-16 has maintained status quo, keeping all its policy rate unchanged. The RBI had taken the markets by surprise in its last policy review when it cut interest rates by more than expected of 50 basis points (bps), but the RBI governor that time had categorically said that the Bank has front-loaded policy action and is now keen on policy transmission of a his cumulative 125 bps cut so far this year by the lenders. Hence keeping the key policy rates unchanged was not a surprise and the next round of rate cuts is likely to come in the next monetary policy meet in February, ahead of the budget. Also, there was some caution ahead of the US Fed meeting and lingering concerns over inflation. Consumer inflation crept back to a four-month high of 5 per cent in October, which likely weighed on RBI’s decision.
In its policy stance RBI decided to-
• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.75 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.
• Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent.
In its policy assessment, RBI noted that since the fourth bi-monthly statement of September 2015, global growth continues to be weak and the global financial markets began Q4 on a calmer note after the Federal Open Market Committee stayed on hold in September. However, on the domestic front, provisional estimates of gross value added (GVA) at basic prices for Q2 of 2015-16 rose on the back of acceleration in industrial activity. Value added in agriculture and allied activities picked up on the modest increase in kharif output and timely policy interventions to stem the effects of the deficient south-west monsoon. The Index of Industrial Production picked up in the second quarter. Though, it said that not all indicators, however, are positive. While urban consumption is showing signs of a pick-up in some areas such as passenger vehicles sales, rural demand has been weakened by two consecutive deficient monsoons and slowing construction activity. Nevertheless, new project announcements as measured by the Centre for Monitoring Indian Economy grew more strongly in the second quarter. It remains to be seen whether growing public investment can crowd in private investment on a sustained basis, despite the still-low capacity utilisation.
It further stated that retail inflation measured by the consumer price index (CPI) increased for the third successive month in October 2015, pushed up by a surge in the monthly momentum. Food inflation rose sharply in October, driven especially by pulses. CPI inflation excluding food, fuel, petrol and diesel also rose for three consecutive months on account of price increases in respect of housing, recreation and amusement, and personal care and effects. It further said that while oil prices, barring geopolitical shocks, are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance and inflation is expected to broadly follow the path set out in the September review, with an inflation target for January 2016 at 6 per cent.
RBI also said that the outlook for agriculture is subdued, in view of both rabi and kharif prospects being hit by monsoon vagaries. It noted that while there are areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand holds back stronger overall growth. Similarly, while prospects for a revival in service sector activity have been boosted by optimism on new business, pockets of lackluster activity such as construction weigh on the overall outlook. Going further it said that it will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments.
