RBI governor Raghu ram rajan announced the first bi-monthly monetary policy for this fiscal year 2016-17 today. The main highlights are:
1. The Repo rate is reduced by 0.25 per cent and is now at 6.50 per cent. Cash reserve ratio (CRR) of scheduled banks is unchanged at 4.0 per cent.
Repo rate is the rate at which RBI lends money to banks. This may lead to reduction in interest rates on all loans by banks.
2. The estimate of GVA (Gross value added) for agricultural and allied activities in Q4 is likely to be achieved. The Reserve Bank’s survey suggests that business expectations for Q1 of 2016-17 continue to be positive for the industrial and for the services sector.
This means that all three sectors of the economy (agriculture, industry and services) are broadly on track.
3. Retail inflation as measured by CPI (consumer price index) is expected to be around 5 per cent for FY 2016-17.
This is a forecast and it does not take into account the price increases due to the implementation of the 7th pay commission report for increase in salaries of government employees. This forecast also assumes a normal monsoon in the period July–September 2016 assumes the current crude oil prices of around US$ 30 per barrel as well as assumes the current exchange rates.
Higher inflation leads to higher cost of living expenses.
4. GDP growth projection is likely to be @ 7.6% for FY16-17
– It is expected to have a normal monsoon after two years of consecutive deficient monsoons.
– Weak domestic private investment, stalled projects, excess capacity in the industry and lower exports outlook are the negative factors to carefully watch (as shared in the policy document of February 2, 2016)
5. RBI still in “accommo dative” mode, while awaiting further data on the development of CPI inflation.
6. RBI wants to ensure that current and past policy rate cuts transmit to lower lending rates by banks for borrowers.
Growth prospects and CPI inflation data will be considered, while deciding the future rate movements.
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