IN: Reserve Bank of India

August 9, 2016 12:30 CDT

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 6.50% 6.50% 6.50%

As expected the RBI announced no changes to its monetary stance at today's Bi-monthly Policy Statement. The benchmark repo rate stays at 6.50 percent and the reverse repo is held at 6.00 percent. Similarly, the marginal standing facility rate and the Bank Rate remain at 7.00 percent. The central bank also signalled no move on the 4.0 percent cash reserve ratio (CRR).

The general tone of the Statement was quite dovish, acknowledging a disappointingly soft global economy and, despite some signs of a modest improvement in business activity, a still relatively lacklustre recovery at home. In fact, the RBI might well have cut official interest rates today but for a sharper than expected pick-up in food prices that, in turn, has raised the expected inflation profile over the rest of the year.

A good monsoon season is seen addressing this issue over coming months but, with a wary eye on wages, the RBI is more cautious about the outlook for core consumer prices. In particular the full implementation of the recommendations of the 7th central pay commission (CPC) on allowances could be significant. As a result, the central bank has stayed with June's projections of a central inflation trajectory towards 5 percent by March 2017 (in line with target) with risks tilted to the upside. Forecast economic growth in FY2016/17 also remains at 7.6 percent.

Today's RBI policy meeting will be the last to be attended by retiring Governor Raghuram Rajan. By the time of the next Bi-monthly Statement on 4th October, interest rates are likely to be set by a new 6-member Monetary Policy Committee. The inflation target (4 percent +/- 2 percent) was officially adopted last week but the MPC is still widely expected to bring a less hawkish slant to policy. Investors will be waiting anxiously to see if monetary policy is still in safe hands.

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.