RBI Policy December 2015

RBI governor Raghuram rajan announced the fifth bi-monthly monetary policy for this fiscal year 2015-16 today. The main highlights are:

 

1. The Repo rate is unchanged at 6.75 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 will lead to no change in interest rates on all loans by banks.

 

2. Uptick in CPI inflation warrants vigilance.

Retail inflation measured by the consumer price index (CPI) increased for the third successive month in October 2015. Food inflation rose sharply in October, driven especially by pulses. Target to take inflation down to 5 per cent by March 2017

Higher inflation leads to higher cost of living expenses.

 

3. GDP growth projection is unchanged @ 7.4% for FY 16.

  • Current outlook for agriculture is subdued, as both rabi and kharif prospects have been hit by monsoon vagaries
  • Industrial growth has shown some pick-up in the second quarter as measured by the IIP(index of industrial production)
  • Outlook for services sector is mixed
  • Exports declined for the eleventh month in a row due to persisting weakness in global trade

 

4. RBI still in “accommodative” mode, while being vigilant on CPI inflation.

Growth prospects and CPI inflation data will be considered, while deciding the future rate movements

 

5. Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks.

RBI will shortly finalize the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to.

This will allow banks to move quickly to decide on interest rate changes.

 

6. The Government is examining linking small savings interest rates to market rates. These moves should further help transmission of policy rates into lending rates

RBI has suggested to the government that interest rates on postal small savings products like Kisan Vikas Patra, Monthly income scheme etc. should be market linked. This will help the banks to match their fixed deposit rates with the small savings rates which in turn will also impact the lending rates of banks.

 

 

Prashant Mehta   prashant.mehta@acm.co.in

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