RBI monetary policy review: Raghuram Rajan keeps repo rate unchanged at 7.50%

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Mumbai | Updated: April 7, 2015 5:10:37 PM

Governor Raghuram Rajan-led Reserve Bank of India (RBI) is expected to keep its benchmark interest rate on hold at 7.50 percent at a policy review...

RBI monetary policy review, RBI monetary policy, raghuram rajan, raghuram rajan policy, repo rate cut, crr rate cut, RBI policy meet, rbi monetary policy review 2015, rbi monetary policy rates, rbi crr rate, rbi crr rate 2015, cash reserve ratio, CRR rate cut, Raghuram Rajan, Reserve Bank of India, market news, business newsReserve Bank of India Governor, Raghuram Rajan along with Deputy Governor Urjit Patel interact with the media during the first bi-monthly monetary policy statement 2015-16 at the RBI headquarters in Mumbai. (PTI)

At its monetary policy review meet today, Reserve Bank of India (RBI) Governor Raghuram Rajan kept policy rate status quo (repo rate, cash reserve ratio stay unchanged) awaiting clarity on impact of unseasonal rains on food inflation even as he wanted banks to pass on benefits of previous two rate cuts.

The repo rate, at which RBI lends to the banking system, will continue to be at 7.50 per cent and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4 per cent.

“Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo,” he said in the first bi-monthly policy review for 2015-16. Check: Analyst Reactions

Arundhati Bhattacharya, Chairman, SBI
The policy decision by RBI to stay put on repo rate was on expected lines. However, with the central bank inflation guidance suggesting a somber trend between now and August, frontloading a repo rate cut may be an option. The decision for more retail participation in G-SEC market is a welcome move. Allowing issue of rupee bonds will facilitate internationalization of the domestic currency. Allowing co-operative banks to issue credit cards and setting up ATMs is a step in the right direction in enabling a seamless access to bank finance.

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Unseasonal rains and hailstorm have impacted rabi crops across North and Western India, raising fears of spike in food prices.

Rajan, who has surprised with two rate cuts of 0.25 per cent each outside the scheduled review meetings this year, however, affirmed his commitment to the accommodative stance, but added that policy moves will be shaped by incoming data and added that transmission of rate cuts by banks will be his top-most priority.

Apart from the transmission, other factors like food prices will also be monitored closely, he said, adding that the impact of the recent unseasonal rains will also be monitored closely.

“Reserve Bank stays vigilant to any threats to the disinflation that is underway,” he said. Check All Highlights

Chanda Kochhar, MD & CEO, ICICI Bank on RBI credit policy
The policy statement has articulated confidence in the economic scenario and the positive direction in which the economy is moving. There are a number of positive policy measures, such as enhancing retail investor access to the g-sec market, permitting Indian companies to issue rupee bonds overseas and permitting market-linked compensation for non-executive directors of banks. Interest rates can be expected to come down as the policy measures already taken reflect in banks’ cost of funding.

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Indranil Pan, Chief Economist, Kotak Mahindra Bank Limited
As expected, the RBI kept the policy rates and the regulatory ratios unchanged. Later at the press conference, the RBI Governor virtually put to rest the market’s aspirations for a CRR reduction in the near future. With the RBI factoring that inflation will reach 5.8% by end-March, 2016 and with the communication remaining guarded on inflation risks due to the threat of weak monsoons, the message from the RBI is that there is possibly little room for future rate cuts. We expect a 25 bps rate cut on June 2nd, the next policy date, which could be the last rate cut this year. The focus in the policy shifts in a significant way to the transmission of policy rate cuts into the real economy through the banking sector. The RBI wanted to make it clear that even as it has not touched the policy rate, the intention is to facilitate financing of growth. One example of this is that RBI prefers banks using the “marginal” cost approach to determine their base rate.

On the transmission mechanism, the RBI said it will encourage banks to move to the marginal-cost-of-funds-based determination, which is “more sensitive to changes in the policy rates”.

Only a few banks namely Union Bank of India and State Bank of Travancore have cut their base rates in the last four months by 0.10 per cent each, as against the 0.50 per cent cuts by RBI.

The banks have held on to the elevated rates even in the face of one of the lowest credit growths in recent years, which is hovering under the 10 per cent mark till now. Check Markets

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On the GDP growth, RBI estimated a 7.8 per cent expansion in the current fiscal, stating that uncertainties on the arrival of monsoon and unanticipated global developments are major risk areas.

On the external front, it said a moderate and uneven recovery is emerging, and flagged the slowdown in China, geopolitical tensions in the Middle East as downside risks.

With speculation rife about a shift in US Fed’s stance to one of hiking rates, which can impact capital flows to the country, RBI said it will “watch for signs of normalisation of the US monetary policy”, but added that the country is better placed to fight any impact with its over USD 343 billion in reserves.

Retail inflation increased to 5.37 per cent in February from the 5.19 per cent for previous month, but many analysts expect it to continue much below the RBI’s January 2016 target of 6 per cent range.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mutual Fund
Status quo in the monetary policy was on the expected lines.  The central banker is taking a nuanced stance towards policy here. The inflation projections are optimistic; yet, the RBI is waiting to study additional inflation data so as to verify the impact of recent seasonal anomalies on supply.  The central banker’s emphasis on rate transmission in the banking system may be indicative that, amongst other things, gradual liquidity easing may be possible. Going forward, the outlook on monsoon would be the key signal directing the policy.

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Another factor which was supporting a rate cut included the range-bound core inflation, which is price rise without the food and oil components. The latest survey of household expectations may also be pointing towards a lower inflation, some watchers said.

However, the impact of factors like unseasonal rains on food inflation was a key impediment to the expectations of a rate cut.

Meanwhile, Chief Economic Adviser Arvind Subramanian said that RBI’s policy statement was “on expected lines”.

Rajan has surprised the markets with two consecutive inter-meeting cuts of a cumulative 0.50 per cent in January and March. While the first was prompted by a dip in household expectations, the second was a consequence of the Union budget, which placated a slew of concerns including the path for fiscal consolidation.

According to experts, it is the transmission of the rate cuts into banks’ lending rates which should be the primary concern for RBI. Many moves, especially on the liquidity management front, were being speculated ahead of the policy.

These included a further cut in the mandatory Statutory Liquidity Ratio or the government bond holding, the cash reserve ratio on which banks earn no interest and also a hike in the reverse repo rate.

Kunal Shah, Fund Manager – Debt, Kotak Mahindra Old Mutual Life Insurance Limited
RBI has maintained status quo as per the expectations. RBI affirmed its continuance of accommodative monetary stance but conditioned its further easing on evolution of transmission of earlier cuts especially in bank lending rates. We believe RBI will like to assess the effect of un-seasonal rains and also projections of monsoon to see its effect on food inflation. As we have highlighted before government policy actions remains key to create room for lower interest rates.
To sum up, Inflation has to undershoot RBIs projection of 5.80% for more easing to come. We believe if government continues to address supply constraints inflation can surprise on downside and create space for more 25 to 50bps of easing and bond yields will eventually drop to 7.50%.

In its developmental policies, RBI today said it will allow banks to invest in the long term bonds for infrastructure and affordable housing issued by their peers, subject to certain conditions.

The investments will not be treated as assets with the banking system in India and there will be limits on the holding, it said, adding that the component held for trading will reduce a bank’s PSL (priority sector lending) benefits.

The RBI also announced that corporate will be allowed to issue rupee bonds, following the success on this front achieved by the government-run institutions and multilateral bodies.

In a significant move, RBI also said that individuals will be allowed to trade in government-bonds through non-competitive bidding platform, which is available only with institutional investors at present.

It said urban cooperative banks of certain size will also be allowed to issue credit cards.

Naresh Takkar, Group CEO, ICRA Ltd
As anticipated, the Central Bank left the benchmark rates unchanged in the first bimonthly monetary policy of FY2016. We continue to expect the RBI to cut the benchmark rates by 50 bps over the remainder of 2015, with the timing contingent on the actual transmission of its past policy actions to lending rates and incoming data, particularly on upside risks to inflation.
While we await the detailed guidelines on various policy announcements, the policy statement reiterates the Central Banks continued thrust on improving the banking structure including financial inclusion while taking additional steps to deepen the domestic debt markets, which is a key prerequisite to making funding available to segments such as infrastructure. The policy statement is likely to provide a fillip to the primary and secondary bond market volumes with increased supply of long tenure senior papers from banks and NBFC – IDFs.


“It’s a wait and watch policy while keeping the positive stance intact. The governor wants earlier 50 bps cuts to percolate to the economy. He is waiting for other stakeholders to do their part including government to remove supply side bottlenecks and banks that still need to do transmission of policy.”

“The RBI kept all rates on hold and said that future policy action will be contingent on transmission of lending rates into the real economy as well upcoming data. I still think we need more accommodative liquidity conditions in the next six months to improve transmission as well as see higher lending growth. We expect the OIS curve to steepen. Look for 2s5s to move towards +25 basis points from current -12 basis points”.

“As expected the RBI maintained a status quo with a clear line of communication with regards to further monetary easing. Though the inflationary situation and government measures to combat supply side effects have started showing signs of improvement, the realization of the same seems to be a medium- term affair. Further the key to a likely 25 bps cut would be dependent on lending rate revision by the bankers, provided both the above mentioned measures progresses well in the right direction.”

“Policy will remain data driven. For the rest of the year, one can expect 25-50 bps cut, but timing of the same is a tough call. Changes in bond markets are quite positive.
“The RBI now expects primary dealers to offer liquidity in semi-liquid government securities, which should improve the structure in bond markets. Changes on external commercial borrowings for corporates would also have a positive impact.”

“I am a little disappointed as I was expecting a rate cut. But the way policy is conducted these days all the rhetorical language doesn’t mean much and it’s entirely data driven. It’s quite possible that we get a nice retail inflation print and the RBI would move. One critical thing that RBI has said is to wait for the impact of its front-loaded rate cuts on bank lending rates. I think that will happen very soon and if data is supportive of a rate cut we might see one between policies.”

“Benchmark rates were left unchanged on concerns over near-term sticky inflation. Calls to lower the cash reserve ratio to aid policy transmission were meanwhile left unanswered, as we expected.
“While a lower CRR might have eased liquidity conditions without straining banks’ interest margins, its uncertain whether that would have been enough to trigger cuts in base lending rate cuts or stoked credit growth. As far as policy transmission is impaired due to weak credit demand and concern over banks’ asset quality, infusion of additional liquidity might not do the trick. Marginal impact on the base rate during the 2012-13 rate cutting cycle also does not set an encouraging precedent.”

– Growth in India’s pivotal services industry lost some momentum in March as input prices rose at the fastest pace in nearly a year, a business survey showed.
– RBI chief said on Thursday the country’s push to build infrastructure should not come at the expense of financial stability, adding banks already had too much exposure to the sector.
– Indian manufacturing growth accelerated in March after a jump in demand even though firms pushed up prices at the fastest rate in four months, a business survey showed.
– India’s April-Feb fiscal deficit at 6.03 trillion rupees – Govt.
– The RBI relaxed rules for foreign investors in exchange-traded currency derivatives by increasing the trading limits allowed without an underlying exposure for the USD/INR  pair to $15 million per exchange from $10 million earlier.
– India’s wholesale prices declined at a much faster-than-expected pace of 2.06 percent on year in February, their fourth straight monthly fall, on the back of plunging global oil prices, government data showed.
– India’s consumer inflation edged up in February for the third straight month, mainly driven by food prices, underscoring the risk of a rebound in inflationary pressures from rising commodity prices.
– India’s industrial output growth accelerated to 2.6 percent in January, mainly driven by growth in the capital goods sector, government data showed.

Top highlights:

The RBI has kept repo rate and the CRR unchanged thereby disappointing those who sought a cut to get relief from their EMIs.

However, RBI has indicated a more accommodative policy stance going forward, based on macro-economic data.

RBI sees retail inflation stabilising at 5-5.5% in FY16.

We are driven more by domestic factors for policy; Fed will not be the key factor, said RBI chief Raghuram Rajan.

RBI expects economic growth rate in 2015-16 at 7.8 per cent, up from 7.5 per cent in 2014-15.

Next rate cut will depend on effective transmission of policy stance by banks, said Rajan.

Banks over time will be forced to match markets and bring down rates, added Rajan.

Earlier in the day, it was expected RBI would keep its benchmark interest rate on hold at 7.50 percent at a policy review on Tuesday, while signalling that it could act swiftly to lower rates further if inflation stays within its target.

This year, the Reserve Bank of India (RBI) has already cut the repo rate twice, by 25 basis points each time, in a bid to bolster economic growth. Neither reduction took place during a regular policy review.

“Having cut rates in mid-March and mid-January, a pause may be warranted to reassess the outlook on inflation,” said Gaurav Kapur, senior economist at Royal Bank of Scotland in Mumbai.

The consumer price index rose 5.37 percent in February, marking a fifth consecutive month of staying within the RBI’s target of 2 to 6 percent.

Earlier-than-expected rainfall in parts of the country have pushed up prices of winter crops, such as wheat and pulses, which could make the RBI cautious over the outlook for inflation. The RBI’s wariness will also be heightened by any rebound in crude oil prices due to tensions in the Middle East.

Only nine of the 40 economists surveyed by Reuters expect the RBI to cut rates on Tuesday, but most expect at least a 25 bps cut by the end of June.

Those analysts reckoning on a rate cut later this month, instead of at a policy review in June, are expecting inflation to remain within target when the next data is released on April 13.

Beyond the outlook for inflation, the RBI has also made rate cuts contingent on Prime Minister Narendra Modi’s government containing its fiscal deficit and passing economic reforms.

Lower Indian interest rates would help stop the rupee  from strengthening further against other currencies whose central banks are cutting interest rates.

A surge in foreign investment flows into India has pushed up the rupee, raising worries about sudden, destabilising outflows should the Federal Reserve start raising U.S. interest rates later this year, as is widely expected.

Analysts also expected any dovish statement from the RBI to be accompanied by more pressure on commercial banks to lower their lending rates. Only a few reduced rates after the previous central bank cuts, raising concerns about the transmission of monetary policy actions to the broader economy.

Although markets have speculated that the RBI could cut the cash reserve ratio (CRR) – the portion of deposits that lenders must keep with the central bank – to boost banks lending capacity, few analysts believe the RBI would resort to such a blunt tool.

With Reuters and PTI inputs

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