CARE Ratings' report on RBI's Monetary Policy
In its maiden policy announcement of FY16, the Reserve Bank of India kept the key policy rate i.e. the repo rate unchanged at 7.5% putting a pause to the two rate cuts earlier in 2015 (both were out of the policy cycle). This is in line with CARE's forecast of a status quo on the repo rate. In the policy announcement, the RBI has seemingly put forward further preconditions before taking action on easing its stance any further.
Highlights- Policy repo rate under the Liquidity Adjustment Facility (LAF) is held constant at 7.5%.- Therefore, reverse repo stands unmoved 100 bps lower than the repo rate at 6.5% while the Marginal Standing Facility (MSF) rate remains 100 bps higher than the repo rate at 8.5%.- Cash Reserve Ratio (CRR) of scheduled banks is also unchanged at 4% of NDTL
Liquidity front- Continue providing liquidity under the overnight repos at 0.25% of bank wise NDTL at the LAF repo rate and through the 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through auctions.- Continuation of daily variable rate repo and reverse repo auctions to foster the smooth management of liquidity.
RBI's Macro Outlook Growth:RBI expects there to be a modest pick-up in GDP growth in FY16 supported by the Government's thrust on infrastructure, a stable inflationary outlook and improving business environment with an increase in private investment. Thereby, the RBI holds a conservative forecast for GDP growth at 7.8% in FY16 compared with 7.4% in FY152.
InflationThe RBI expects consumer inflation to prevail near existing levels for Q1 FY16, soften in Q2 to reach around 4% in Aug '15 and then increase to 5.8% by Mar '16.
Going ahead, the RBI has stated that its preconditions on further policy easing would emanate from the developments in the transmission channel of the monetary policy (lending rate cuts by Banks), movement in food prices and progress of monsoon. Lastly, although the Indian economy stands in better light than the last instance, RBI would closely monitor signs of monetary policy normalization in the USA.
Overall, RBI's first bi-monthly credit policy has been largely in line with CARE's expectations.- We retain our expectation of a GDP growth of 8% in FY16 contingent on a normal monsoon and absence of any untoward shock.- While, we still foresee a 50 basis points cut in the repo rate in FY16, the same is unlikely to be seen till June '15.- Thus, the 10 year government security paper is viewed to remain around 7.7% until any action on interest rate is taken by the RBI.
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