RBI keeps repo rate unchanged at 6.75%
Moneylife Digital Team 01 December 2015

While keeping key rates unchanged, the RBI said some indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness

 

The Reserve Bank of India (RBI), in its fifth bi-monthly credit policy review on Tuesday has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged. With repo rate remaining at 6.75%, the reverse repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 5.75%, and the marginal standing facility (MSF) rate and the bank rate at 7.75%.

 
In a statement, RBI Governor Dr Raghuram Rajan said, "The Reserve Bank will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments. The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path."
 
"In the meantime, since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points (bps) has been transmitted by banks. The median base lending rate has declined only by 60 bps. The Reserve Bank will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to. The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates. In addition, the on-going clean-up of bank balance sheets will help create room for fresh lending," the statement from RBI said.
 
Ratings agency, CRISIL, feels that the policy transmission rates, which have remained weak, are an area of concern. It said, "So far in 2015, the policy repo rate has been cut by 125 bps. But while market-driven interest rates such as those on CPs and CDs have fallen 90-120 bps across maturities, bank lending rates have seen much weaker transmission. This limits the boost to consumption from lower interest rates.:
 
According to RBI, the economy is in early stages of recovery. It said, "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. Other indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness."
 
Commenting on the central bank's policy, Arundhati Bhattacharya, Chairman of State Bank of India (SBI) said, "RBI's announcement to keep the repo rate unchanged is on expected lines. Today's policy undertone has leaned towards the neutral-to-dovish side. Governor's indication of being accommodative policy sends a positive signal for Indian economy. The guidelines on the base rate calculation based on marginal cost of funds will be watched and appropriate actions will be taken on the same. Overall with CAD and inflation targets well within control and Q2 GDP at 7.4%, the Indian economy seems headed for a good financial year ahead."
 
In view of both rabi and kharif prospects being hit by monsoon vagaries, the outlook for agriculture is subdued, the central bank said, adding, "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 lacklustre activity such as construction weigh on the overall outlook."
 
RBI said, step-up in public capital spending and the easing stance of monetary policy provide the enabling environment for a revival in private investment demand, supported by easing input prices and improving conditions for doing business. The growth projection for 2015-16 has accordingly been kept unchanged at 7.4% with a mild downside bias, it added.
 
Here are the latest policy rates following RBI review…
 
Repo Rate.......................6.75%
Reverse Repo Rate.........5.75%
CRR.................................4%
Bank Rate.......................7.75%
 
The sixth bi-monthly monetary policy statement will be announced on 2 February 2016.
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