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IN: Reserve Bank of India Announcement
| Consensus | Consensus Range | Actual | Previous | |
| Change | 0bp | 0bp to 0bp | 0bp | 0bp |
| 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. This rate was cut aggressively over 2025 but now has been left on hold for three consecutive meetings. Officials indicated today, however, that they are ready to raise policy rates if price pressures caused by the Iran conflict have a broader impact.
Data released since the RBI's previous meeting in April have shown an increase in headline CPI inflation from 3.21 percent in March to 3.40 percent in April and 3.48 percent in May, closer to the mid-point of the RBI's target range of two percent to six percent. PMI survey data continue to indicate robust economic activity, while less timely data show industrial production growth was solid in April.
In the statement accompanying today's decision, RBI officials again highlighted the uncertainty associated with the Iran conflict, judging that risks to both growth and inflation have increased since their previous meeting. In particular, they expect higher commodity prices and supply disruptions to weigh on economic activity and also predict that unfavourable rainfall patterns will curb agricultural output. Reflecting these factors, officials now forecast growth of 6.6 percent in the current fiscal year, with annual headline and core inflation forecast to be 5.1 percent and 4.7 percent respectively.
Reflecting this assessment, officials decided it would be prudent to wait for greater clarity to emerge despite their concerns about the inflation outlook. The policy stance also remains"neutral". They indicated, however, that they are ready to tighten policy if supply side pressures become embedded in the general price level and inflation expectations.
Market Consensus Before Announcement
RBI expected to keep rates unchanged but to anticipate rate increases if inflation does not ease.
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.