IN: Reserve Bank of India

Tue Oct 03 19:00:00 CDT 2017

Consensus Actual Previous
Change 0bp 0bp -25bp
Level 6.0% 6.0% 6.0%

The Reserve Bank of India has kept its benchmark repurchase rate on hold at 6.00 percent at its policy review held today, in line with the consensus forecast. Officials cut this rate by 25 basis points at the last policy review in August. Another policy rate, the reverse repurchase rate, was also left on hold at 5.75 percent. These decisions were agreed to by five of the six members of the Monetary Policy Committee, with the other member favouring a reduction in policy rates of 25 basis points.

Today's statement notes that the new goods and services tax introduced by the government in July appears to have had an adverse impact on activity, particularly in the manufacturing sector, and has the potential to add to other factors weighing on the outlook for business investment. Officials also noted that advance estimates for the production of some food grains have been weak. Reflecting these factors, the RBI has revised down its forecast for economic growth in the current fiscal year from 7.3 percent to 6.7 percent.

Despite this downward revision to growth forecasts, the outlook for inflation appears to remain the main focus of the RBI. Officials argued at the last policy review in August that recent declines in headline inflation had provided scope for the rate cut delivered then, but also made clear that they believed these declines were largely due to temporary factors. Consistent with this view, data published since that review has shown headline CPI inflation picking up from a low of 1.54 percent in June to 2.36 percent in July and 3.36 percent in August. WPI inflation has followed a similar trajectory.

These recent increases take inflation closer to the mid-point of the RBI's target range of 2.0 percent to 6.0 percent. The RBI previously forecasted inflation will be between 4.0 percent and 4.5 percent in the second half of the current fiscal year, but has now slightly revised that range higher to between 4.2 percent and 4.6 percent, reflecting factors such as the GST and higher global oil prices. Officials also expressed concern that planned public sector pay rises could push headline inflation higher than currently expected, but note that food price increases may turn out to be weaker than anticipated.

The RBI's scope for further rate cuts has also been restricted by external events, in particular the prospect of higher policy rates in the United States. India's currency, the rupee, has weakened significantly in recent weeks as investors price in higher US rates, and any move to lower Indian rates would likely exacerbate this trend and put upward pressure on inflation.

Given these concerns about the inflation outlook, a majority of the MPC concluded that another rate cut was not warranted at present and that the policy stance should remain "neutral". This preference for policy stability will likely continue in coming months if headline inflation continues to rise as expected.

The Reserve Bank of India (RBI) issues six Bi-monthly Policy Statements a year. During these announcements the RBI will signal any shifts in its monetary stance, particularly with reference to the benchmark repo interest rate and its cash reserve ratio (CRR). The Governor will also update the Bank's view of recent economic developments and provide new forecasts for inflation and growth. A 4 percent inflation target with a +/- 2 percentage point tolerance band was formally implemented in August 2016 and will be overseen by a new six-member Monetary Policy Committee (MPC).

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.