IN: Reserve Bank of India

Thu Apr 05 04:00:00 CDT 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 notes that recent data indicate that domestic demand is strengthening, albeit partly offset by weaker external demand. Looking ahead, officials expect business investment to improve and exports to rebound. Reflecting this assessment, economic growth is forecast to pick up from an estimated 6.6 percent in the fiscal year just ended to 7.4 percent in the new fiscal year, up from a previous forecast of 7.2 percent.

With officials more confident about the growth prospects, the outlook for inflation remains the main focus for the RBI. After some volatility over 2017, price pressures have moderated in recent months, with headline CPI inflation falling from a 17-month high of 5.21 percent in December to 4.4 percent in February, closer to the mid-point of the RBI's target range of 2.0 percent to 6.0 percent. This decline since the start of the year has mainly been due to smaller gains in food and fuel prices, with inflation excluding these two factors steady in recent months.

In response to the drop in food and fuel prices in the last two months, officials have revised down their near-term forecasts for headline inflation. Headline inflation is now forecast to be between 4.7 percent and 5.1 percent in the first half of the new fiscal year, compared with a previous forecast for above 5.0 percent, and to fall to 4.4 percent in the second half, compared with the previous forecast of 4.,5 percent. Nevertheless, officials continue to argue that risks to this forecast are skewed to the upside, with the statement again stressing that [price pressures could build if the government's targets for reducing its fiscal deficit are not met.

With officials relatively positive about the growth outlook but still wary about the inflation outlook, 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 prove to be stronger than currently anticipated. The next policy review is scheduled for early June.

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.