IN: Reserve Bank of India

Wed Dec 06 06:00:00 CST 2017

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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 last adjusted this rate in August with a cut of 25 basis points. Another policy rate, the reverse repurchase rate, was also left on hold today 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 economic growth in the most recent quarter was weaker than officials had expected at their last policy meeting in October, reflecting the impact of higher oil prices and lower output of some key agricultural products. Officials noted, however, that credit growth has strengthened in recent months and pointed to positive sentiment in the services and infrastructure sectors. Reflecting these factors, the RBI has retained its forecast for India's economy to grow by 6.7 percent in the current fiscal year.

With officials keeping their growth forecasts unchanged, the outlook for inflation appears to remain the main focus for the RBI. Headline inflation dropped sharply to a low of 1.54 percent mid-year but officials argued then that this was largely due to temporary factors. Consistent with this assessment, headline CPI inflation has risen to around 3.5 percent in each of the last three months, while WPI inflation has followed a similar trajectory. These recent increases have taken inflation closer to the mid-point of the RBI's target range of 2.0 percent to 6.0 percent.

Today's statement argues that recent inflation outcomes have been "broadly in line" with projections, and the the outlook will depend on several factors, including global oil prices, the strength of agricultural output, and the extent to which recent adjustments in sales tax rates for some products passes through to retail prices. The RBI previously forecasted inflation will be between 4.2 percent and 4.6 percent in the second half of the current fiscal year, but has now revised that range slightly higher to between 4.3 percent and 4.7 percent

With officials relatively positive about the growth outlook and expecting inflation to pick up further in coming months, 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 remain in place 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.