The RBI fulfilled expectations for no shift in policy at today's Bi-Monthly Monetary Policy Statement. The benchmark repo was held at 6.75 percent, the reverse repo at 5.75 percent and the marginal standing facility rate and Bank Rate both left unchanged at 7.75 percent. At the same time the central bank also confirmed that the cash reserve ratio (CRR) would stay at 4.0 percent.
In justifying its stance the RBI pointed to its September statement when it stressed that its (unexpectedly aggressive) 50 basis point ease should be seen as front-loading in response to weak domestic and global demand. Since then inflation had turned up as anticipated and was expected to climb higher this month before plateauing. Indeed, uncertainty about crop supply in the wake of the El Nino was seen as making for some near-term upside risk.
However, more generally inflation was seen broadly following the profile laid out in September with the medium-term balance of risks tilted slightly to the downside. The real GDP growth forecast for FY2015/16 was also left unmodified at 7.4 percent.
Looking ahead the RBI alluded to further monetary accommodation to come, not least because so far this year only around half of its interest rate cuts have been passed on in terms of lower commercial bank lending rates. To this end, with an inflation target of 5 percent in March 2017 currently looking readily achievable, any downside surprises in CPI inflation next year should quickly see financial markets anticipating another cut in official interest rates.
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.