As widely expected, the Reserve Bank of India (RBI) on Tuesday kept key rates unchanged in its sixth bi-monthly monetary policy review. RBI Governor Raghuram Rajan said if the Union Budget 2016-17 makes enough structural reforms to boost growth, the central bank could chip in with cheaper money to boost growth. Finance Minister Arun Jaitley is slated to present the Union Budget 2016-17 on February 29.
Below are top 10 key takeaways from the monetary policy.
1. The Reserve Bank of India kept the repo rate and cash reserve ratio (CRR) unchanged at 6.75 per cent and 4 per cent respectively.
2. Since the fifth bi-monthly statement of December 2015, global growth has slowed, with the ongoing weakening of activity in major emerging market economies (EMEs) outweighing the recovery in some advanced economies. World trade has remained subdued, held down by anaemic demand, new lows in commodity prices and currency realignments.
3. Bearish commodity price dynamics are also likely to impact investor sentiment.
4. On the domestic front, economic activity lost momentum in Q3 of 2015-16, pulled down by slackening agricultural and industrial growth.
5. In the first two months of Q3 of 2015-16, industrial activity slowed in relation to the preceding quarter. This mainly reflects weak investment demand with some deceleration of capital goods production. Stalled projects continue to remain high, and there is a decline in new investment intentions, perhaps on the back of low capacity utilization.
6. GDP growth for 2015-16 is kept unchanged at 7.4 per cent with a downside bias. For 2016-17, growth is expected to strengthen gradually, notwithstanding significant headwinds. Expectations of a normal monsoon after two consecutive years of rainfall deficiency, the large positive terms of trade gain, improving real incomes of households and lower input costs of firms should contribute to strengthening the growth momentum. Yet, still weak domestic private investment demand in a phase of balance sheet adjustments, re-emergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening export growth could act as headwinds. Based on an assessment of the balance of risks, GDP growth for 2016-17 is projected at 7.6 per cent.
7. In keeping with the Government’s start-up India initiative, the Reserve Bank will take steps to ease doing business and contribute to an ecosystem that is conducive for growth of start-ups.
8. The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17.
9. Rajan said that the central bank has not factored in 7th pay panel recommendation in inflation target. “How the government implements a planned 24 per cent pay hike in salaries and pensions for some 10 million current and former government employees will also be key in determining the path of inflation,” he said.
10. The first bi-monthly monetary policy statement for 2016-17 will be announced on Tuesday, April 5, 2016.