RBI MONETARY POLICY UPDATE

RBI governor Raghuram rajan announced the fourth bi-monthly monetary policy for this fiscal year 2015-16 today.

The main highlights are:

 

1. Reduction of the policy repo rate by 0.50 per cent from 7.25 per cent to 6.75 per cent with immediate effect

 

Repo rate is the rate at which RBI lends money to banks. This will lead to lower interest rates on all loans by banks from today as banks have to reduce their own lending rates for their borrowers.

 

Since the January 2016 target of 6 per cent inflation is likely to be achieved, the RBI has taken this step.

 

2. Cash reserve ratio (CRR) of banks unchanged at 4.0 per cent

 

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If RBI decides to increase the CRR, then the available amount with the banks for lending comes down. The RBI uses the CRR to drain out excessive money from the system.

 

There was excess money during august to mid-September due to factors such as deposit mobilization in excess of credit flow, lower currency demand and pick-up in spending by the government.

 

3. Cut the FY 15 GDP growth rate to 7.4% from 7.6%

 

This is due to the following factors

 

An overall mild economic recovery is underway.

 

In the agriculture sector, the southwest monsoon is currently deficient by 14 per cent across the country. This will lead to lower rural demand, as is reflected in lower sales of tractors and two-wheelers.

 

The manufacturing sector has shown uneven growth in April-July, with industrial activity slowing down in July. The manufacturing purchasing managers’ index (PMI) slowed from July due to weak domestic demand and export orders.

 

The services sector purchasing managers’ index (PMI) increased for the second consecutive month on improving new business.

 

Purchasing managers index (PMI) is derived from monthly surveys of purchasing managers in private sector companies. The survey covers five parameters, viz: production level, new orders from customers, speed of deliveries by suppliers, inventories (unsold goods) and employment level.

 

4. Expect consumer price inflation at 5.8% in January 2016.

 

Inflation reached its lowest level in August 2015 since November 2014. (Inflation is the rise in prices of goods and service)

 

The slowing of inflation in this year is due to a combination of low month-on-month increases in prices and favorable base effects (as the base was higher earlier, the slow down in inflation becomes more prominent statistically)

 

Inflation expectations of households remained high in double digits due to recent month-on-month increases in the prices of vegetables and pulses.

 

Looking forward, inflation is likely to increase from September for a few months as favorable base effects reverse.

 

A weak monsoon (which may lead to higher prices of food grains, vegetables, fruits and pulses) and rising fuel (petrol, diesel and CNG) prices may increase inflation.

 

5. RBI will have an accommodative stance while continuing to be vigilant as global environment looks weak

 

It means that RBI would like to support economic growth in the Indian economy while realizing that economic growth in Europe, Japan, China, Russia, Brazil and South Africa is slowing down.

 

6. RBI will work with the government to ensure that transmission in rate cuts takes effect.

 

It means that from January 2015 till date, while RBI has cut interest rates by a total of 1.25 per cent, however banks have not cut their lending rates by 1.25 per cent.

 

Hence, RBI will work with the government to find solutions to the problems that banks are facing to cut lending interest rates.

 

RBI has observed that while banks have reduced deposit rates but they have not cut lending rates.

 

Prashant M.Mehta

prashant.mehta@acm.co.in

 

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