IN: Reserve Bank of India

Wed Feb 07 06:00:00 CST 2018

Consensus Actual Previous
Change 0bp 0bp 0bp
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 last adjusted this rate in August 2017 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 an increase in policy rates of 25 basis points.

Today's statement revises down the RBI's estimate for economic growth in the current fiscal year from 6.7 percent to 6.6 percent. Looking ahead, officials expect growth to pick up to 7.2 percent in the upcoming fiscal year, reflecting their assessment that the economy is adjusting well to the introduction last year of the government's new sales tax. Exports and business investment are also forecast to provide greater support to growth.

With officials expecting growth to strengthen, the outlook for inflation remains the main focus for the RBI. Headline inflation dropped sharply mid-2017 but officials argued then that this was largely due to temporary factors. Consistent with this assessment, price pressures have strengthened in recent months, with headline CPI inflation increasing to a 17-month high of 5.21 percent in December, towards the top of the RBI's target range of 2.0 percent to 6.0 percent. This increase has largely been due to higher vegetable prices.

Looking ahead, officials forecast headline inflation to be above 5.0 percent in the first half of the upcoming fiscal year and then to fall to around 4.5 percent in the second half, but they argue that risks to this forecast are skewed to the upside. In addition to the normal risks associated with the impact of the monsoon season on food prices, the RBI noted that public sector wages and global oil prices could put upward pressure on inflation. They also noted that inflation could increase if the government's targets for reducing its fiscal deficit are not met.

With officials relatively positive about the growth outlook and expecting inflation to pick up in coming months, a majority of the MPC concluded that policy rates should stay on hold and that the policy stance should remain "neutral". The statement stresses, however, that officials are committed to keeping inflation close to 4.0 percent, suggesting that rate increases may be considered if price pressures strengthen further.

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.