The RBI today cut interest rates by an additional 25 basis points at another unscheduled meeting. The second surprise move this year put the benchmark repo rate at 7.5 percent and was accompanied by 25 basis point reductions in the reverse repo to 6.50 percent and in the MSF rate and Bank Rate to 8.5 percent, all with immediate effect. However, the cash reserve ratio was again held at 4.0 percent.
The latest cut, which came somewhat ahead of most analysts' forecasts, was attributed by the central bank to low capacity utilisation, weak real economy indicators and sluggish credit. It clearly indicates that the government's newly delivered annual budget was not seen as posing any inflationary risks and that the recently confirmed inflation targets would be undershot were policy not to be loosened again. The monetary ease also suggests that the central bank is more than a little dubious about the quality of the revised and rebased national accounts data.
The next scheduled monetary policy meeting is in April which is probably a little too soon for a further interest rate cut. However, having been surprised twice already in 2015, financial markets, which responded well to today's announcement, will be taking nothing for granted. Inflation developments will be instrumental.
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.