The RBI today delivered its first cut in key interest rates since last September. A 25 basis point reduction in the benchmark repo rate to 6.50 percent was in line with market expectations and accompanied by a 100 basis point narrowing in the policy rate corridor via a 25 basis point increase in the reverse repo rate to 6.00 percent and a 75 basis point decrease in the Marginal Standing Facility (MSF) rate to 7.00 percent. The reduction in the interest rate corridor was made with a view to ensuring a finer alignment of the weighted average call rate (WACR) with the repo rate.
Bank Rate was similarly lowered 75 basis points to also 7.00 percent and, while no adjustment was made to the 4.00 percent cash reserve ratio (CRR), the Statutory Liquidity Ratio (SLR) was lowered from 21.50 percent to 21.25 percent and the daily maintenance CRR reduced from 95 percent to 90 percent. These measures should help to boost liquidity.
Today's ease would seem to reflect mainly worries about the global economy as domestic inflation has moved broadly in line with the profile projected in January and the FY2016/17 growth forecast is unchanged at 7.6 percent. Indeed, the RBI noted some upside risk to prices going forwards in respect of the implementation of the 7th Central Pay Commission awards. However, the central bank is clearly still worried that previous official rate cuts have not been passed on in full in terms of commercial bank lending rates and this will be all the more important in the wake of the government's ongoing fiscal consolidation efforts.
The RBI indicated that it would cut interest rates again should economic conditions warrant. As usual, inflation will be key and the central bank will be determined to hit its 5 percent target for March 2017.
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.