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IN: Reserve Bank of India Announcement
| Consensus | Consensus Range | Actual | Previous | |
| Change | 0bp | 0bp to 0bp | 0bp | -25bp |
| Level | 5.25% | 5.25% to 5.25% | 5.25% | 5.25% |
Highlights
The Reserve Bank of India's Monetary Policy Committee has left its benchmark repurchase rate on hold at 5.25 percent at its policy review held today, in line with the consensus forecast. Officials have cut this rate by 125 basis points since the start of last year after the rate had been left on hold for two years.
Data released since the RBI's previous meeting in December have shown an increase in headline CPI inflation from a record low of 0.25 percent in November to 0.71 percent in December and 1.33 percent in January, still well below the RBI's target range of two percent to six percent. This weakness has largely been driven by favourable weather conditions that resulted in large declines in food prices. PMI survey data continue to indicate robust economic activity, while less timely data show industrial production growth rebounded in November and December.
In the statement accompanying today's decision, RBI officials noted the recent weakness in inflation and advised they have revised their inflation forecast for the current fiscal year slightly from 2.0 percent to 2.1 percent. Further ahead, the see the inflation outlook as"benign and near the inflation target". Officials remain optimistic about domestic resilience, underpinned by strong consumption demand, and supportive fiscal measures.
Reflecting this more benign inflation outlook, officials concluded today that current policy settings remain appropriate for now. The policy stance remains"neutral".
Market Consensus Before Announcement
Forecasters see no rate move from the RBI through year end after 125 basis points of cuts.
Definition
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).
Description
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.