IN: Reserve Bank of India

Tue Aug 04 00:30:00 CDT 2015

Consensus Actual Previous
Change 0bp 0bp -25bp
Level 7.25% 7.25% 7.25%

As widely expected, the RBI left key interest rates on hold today. Accordingly, the benchmark refi rate stays at the 7.25 percent mark to which it was lowered in June and the reverse repo is held at 6.25 percent. Similarly the MSF rate and Bank Rate remain at 8.25 percent. The central bank also made no change to the cash reserve ratio (4.0 percent).

The economic recovery at home was described as work in progress. On the positive side, the RBI now sees an increased likelihood of a good harvest following heavy monsoon rainfall in June but business optimism has fallen since the last meeting and export industries have been hit by a combination of weak overseas demand and a significant depreciation by a number of key trading partner currencies. Moreover, capacity utilisation is still low and a major contributor to soft corporate investment. However, there have been some recent indications of a pick-up in consumption.

Meantime, inflation was seen as having behaved much as expected in recent months. Projections versus the June forecast are about 0.2 percentage points lower for the first quarter of next year, mainly reflecting softer crude oil costs and monsoon effects. Even so, risks to the 6.0 percent interim target are regarded as broadly balanced and the Bank noted uncertainty about the how the hike in service sector taxes introduced in June would pan out. Inflation is expected to be biased down by base effects in July and August but the central bank will look through these in assessing underlying trends.

Overall the RBI seems happy enough with its current policy stance and in no hurry to cut interest rates again. That said, it still wants to see a fuller transmission by banks of its front-loaded rate reductions.

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.