In a much anticipated move, the Reserve Bank of India (RBI) has once again cut the key lending repo rate by 25 basis points (0.25%) in its first bi-monthly policy review of the financial year 2016-17. RBI also lowered the Cash Reserve Ratio (CRR) and Marginal Standing Facility (MSF), which would collectively pump in Rs 21,000 crore into the system. While, the minimum daily maintenance of the CRR that banks have to maintain with the Central bank was reduced by 5% to 90% with effect from April 16, the Marginal Standing Facility (MSF) was reduced by 0.75% to 7.0%. After the central government’s decided to stick to fiscal discipline and bring small savings rates down, benchmarked against the yield on government bonds of like maturity and inflation behaving, more or less in line with its estimates, it was expected that the RBI will go for a rate cut.
In its policy stance RBI decided to:
reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.75 per cent to 6.5 per cent;
reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016, while keeping the CRR unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality; and
narrow the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate;
Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 percent, and the marginal standing facility (MSF) rate to 7.0 per cent. The Bank Rate which is aligned to the MSF rate also stands adjusted to 7.0 per cent.
The central bank in its assessment for the policy review said that since the sixth bi-monthly statement of February 2016, global economic activity has been quiescent. Perceptions of downside risks to recovery in some advanced economies at the beginning of 2016 have eased, while major emerging market economies (EMEs) continue to contend with weak growth and still elevated inflation amidst tighter financial conditions.
On domestic inflation front, RBI said that retail inflation dropped sharply in February after rising for six consecutive months. This favourable development was due to a larger than anticipated decline in vegetable prices, helped by prices of pulses starting to come off the surge that began in August, and effective supply management that helped limit cereal price increases.RBI said that Inflation has evolved along the projected trajectory and the target set for January 2016 was met with a marginal undershoot. Going forward, CPI inflation is expected to decelerate modestly and remain around 5 per cent during 2016-17.
Delving further into the policy stance, the apex bank said that the uneven recovery in growth in 2015-16 is likely to strengthen gradually into 2016-17, assuming a normal monsoon, the likely boost to consumption demand from the implementation of the 7th Pay Commission recommendations and OROP, and continuing monetary policy accommodation.
Talking about the global conditions, it said that global financial markets have recouped the losses suffered in the turbulence at the beginning of the year. Currencies across EMEs have also appreciated as portfolio flows returned cautiously to local debt and equity markets. However, it cautioned that the uneasy calm that prevails in financial markets could be dispelled easily by a sudden return of risk-off investor sentiment on incoming data, especially pertaining to China or to US inflation.
RBI has guided for an accommodative monetary policy stance, and retained its gross domestic product (GDP) growth estimate at 7.6% for this fiscal year. The central bank’s focus is now shifting from rate reduction to liquidity measures, which been addressed partly by lowering the minimum daily balances to be held under CRR. The government too has said that the rate cut by the RBI would provide a 'good stimulus' for the economy and encourage banks to reduce lending rates.
