IN: Reserve Bank of India

Tue Apr 07 00:30:00 CDT 2015

Consensus Actual Previous
Change 0bp 0bp -25bp
Level 7.5% 7.5% 7.5%

The RBI left key interest rates unchanged at today's policy setting meeting. The benchmark repo rate, which was surprisingly cut 25 basis points at the start of March, stays at 7.5 percent and the reverse repo at 6.5 percent. The central bank also opted to keep the cash reserve ratio (CRR) steady at 4.0 percent. Today's decision was in line with the majority market view although there was a significant minority looking for another 25 basis point ease.

Maintaining the status quo reflected domestic inflation developments that have largely followed the official forecast and a broadly neutral assessment of economic risks going forward. It was also attributable to the failure of the two interest rate cuts already delivered in 2015 to be transmitted into banks' lending rates. To this end, additional monetary easing will be contingent upon both a fall in private sector borrowing costs as well as upcoming economic data.

The overall tone of the central bank statement suggested that it has no real bias to policy at the moment. However, with input cost inflation having fallen sharply in recent months and rural wage growth now well short of the double digits rates seen over much of 2013, there is still a high likelihood that official interest rates will be lowered again over coming quarters.

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.