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RBI holds repo rate; single rate cut seen in 2015

The News International Team

The Reserve Bank of India (RBI) today decided to leave interest rates unchanged when it met for a bi-monthly review, after effecting two out-of-cycle rate cuts earlier this year for 25 basis points (0.25 percent) each.

As a result, the headline repo rate, the rate at which the RBI lends to commercial banks, continues to stand at 7.5 percent.

The Raghuram Rajan-led central bank also decided to leave the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) unchanged at 21.5 percent and 4 percent, respectively.

The SLR (expressed as percentage of net deposits to be kept in liquid assets) and CRR (percentage of funds kept with the RBI) are also tools used by the central bank to adjust liquidity in the system.

In its monetary policy statement, the RBI said that it would prefer to stand pat in light of recent signs of pick-up in economic activity and comfortable liquidity conditions, and as it awaits transmission of the recent rate cuts into the economy, further data on inflation, shift in the quality of government spending, and for the Federal Reserve’s moves on interest rate in the US.

‘Await lending rate cuts, inflation on target path’

Despite the central bank cutting rates twice this year, leading lenders such as SBI and ICICI Bank are yet to cut major lending rates. Experts believe banks may cut rates in the next few months as economic activity further gathers steam and credit demand picks up.

“Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts,” it said, adding that it in order to improve the efficiency of monetary policy transmission, it would issue guidelines to help banks compute their base rates based on marginal cost of funds.

The government and the central bank recently signed an agreement in which the latter would formulate monetary policy with the aim of achieving specific inflation targets.

“The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years,” the central bank said in a statement.

“The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 percent by January 2016 and at 4 percent by the end of 2017-18,” it added.

The disinflation expectation glide path is currently intact, according to the central bank, with equal upside and downside risks to its 6 percent target.

One more rate cut seen; market fluctuates

The central bank’s move was expected, JPMorgan chief India economist Sajjid Chinoy told CNBC-TV18. Going forward, he said he expected the Reserve Bank to cut rates only once by 25 basis points during the remainder of the year.

The central bank has said it will target a real interest rate (interest rate minus inflation) of 1.5-2 percent,” the economist pointed out. “If it expects inflation to hover around 6 percent early next year, there is not much scope [from current repo rate levels of 7.5 percent].”

As the rate cut put paid to the few hopes that the central bank would cut rates, stocks became volatile, with the Nifty swinging either side of the flat line, before losing ground. The Bank Nifty was down about 1 percent.

Inflation vs interest rates since 2010 | Create infographics

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