IN: Reserve Bank of India

Mon Feb 02 23:30:00 CST 2015

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 7.75% 7.75% 8.0%

The RBI left benchmark interest rates unchanged today which, having only just lowered rates last month, will come as no surprise to anyone. The key repo rate stays at 7.75 percent and the marginal standing facility (MSF) rate and Bank Rate remain at 8.75 percent. There was also no move on the cash reserve ratio (4.0 percent).

However, with a view to boosting the supply of credit, the statutory liquidity ratio (SLR) of scheduled commercial banks will be by lowered by 50 basis points to 21.5 percent. The Bank also indicated that it would replace the export credit refinance (ECR) facility with the provision of system level liquidity with effect from 7th February.

The central bank seems relatively happy with the way in which inflation has evolved in recent months and held out the promise of additional rate cuts should future CPI data imply continued disinflationary pressure. Critical will be the extent to which fiscal policy is tightened, presumably all the more important now in the wake of last week's upward revisions to historic real GDP growth. The RBI's own growth forecasts are broadly in line with the December Monetary Policy Statement but this could change once the fourth quarter GDP data become available next week.

In any event the general tone of today's policy announcement suggests that the RBI is operating with at least a mildly easing bias and should leave many in financial markets speculating about when the next cut will come.

The central bank of India announces its monetary policy with regard to interest rates about every six weeks.

Although the RBI monitors many economic indicators - as indeed all central banks do - the RBI most closely monitors inflation. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity while lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, fewer homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or for those who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India. Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Its function is to advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time. Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.