RBI MONETARY POLICY UPDATE – June 2016

RBI governor Raghu ram rajan announced the second bi-monthly monetary policy for this fiscal year 2016-17 today. The main highlights are:

 

1. The Repo rate is unchanged 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 no change in interest rates on all loans by banks.

 

2. There is an upside risk to the retail inflation as measured by CPI (consumer price index) forecast of 5 per cent by March 2017. This means that retail inflation may remain higher than the forecast of 5 per cent.

 

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 and the increase in international crude oil prices. This forecast also assumes a normal to strong monsoon in the period July–September 2016.

 

Retail inflation, largely driven by food prices, has increased up to 5.4 percent in April from 4.8 percent in March.

Higher inflation leads to higher cost of living expenses.
 
3. India’s factory output in March at just 0.1 per cent was weaker, after having expanded by 2 percent in February.

 

4. GDP growth projection is likely to be @ 7.6% for FY16-17
– It is expected to have a normal to strong 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.

 

5. RBI still in “accommodative” mode, while awaiting further data on the development of CPI inflation.

 

6. The government’s reform measures by reducing the post office small savings rates combined with RBI’s refinements in the liquidity management framework should help the transmission of past rate reductions into lending rates of banks.
 
7. The Reserve Bank will shortly review the implementation of the Marginal Cost Lending Rate framework by banks. Government needs to infuse capital into the public sector banks promptly to help them start lending to the industry.
 
8. Growth prospects and CPI inflation data will be considered, while deciding the future rate movements.

prashant.mehta@acm.co.in

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