Reserve Bank of India leaves door open for more easing

By: | Updated: August 4, 2015 3:50 PM

RBI policy kept its policy rate on hold at 7.25%, as widely expected, while leaving the door open to ease further depending on the inflation outlook and how swiftly banks lower their lending rates.

rbi monetary policyThe RBI maintained its consumer inflation target of 6 percent for January 2016, saying risks to that goal were “broadly balanced”, a slight change from its statement on June 2 when it said risks to that target “were tilted to the upside.” (Reuters)

Reserve Bank of India policy kept its policy rate on hold at 7.25 percent on Tuesday, as widely expected, while leaving the door open to ease further depending on the inflation outlook and how swiftly banks lower their lending rates.

The Reserve Bank of India (RBI) also said government economic reforms and the timing of any increase in U.S. interest rates would be key factors that will determine whether the central bank cuts rates for a fourth time this year.

“It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of the monetary policy,” the RBI said in its statement.

“As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for accommodation.”

India’s benchmark 10-year bond yield was largely unchanged after the RBI decision. The broader NSE index was down 0.5 percent.

The RBI has reduced its policy rate by three-quarters of a percentage point since embarking on an easing cycle in January. The last cut lowered the repo rate to 7.25 percent on June 2.

But, to the central bank’s chagrin, the benefits for the broader economy have been limited because of commercial banks’ reluctance to lower their lending rates.

The RBI’s next policy review is set for Sept. 29. That would be after the Fed’s September meeting, and any increase in U.S. rates is expected to suck money out of emerging markets.

All but four of 51 analysts predicted the RBI would keep the repo rate on hold on Tuesday, but views were split over future action. Twenty-four analysts predicted another 25 basis points cut this year, while 23 saw no change.

Higher food prices pushed India’s annualised consumer inflation up to 5.4 percent in June, and analysts say the outlook will depend on rains as the monsoon season enters its climax over the next two months.

The RBI maintained its consumer inflation target of 6 percent for January 2016, saying risks to that goal were “broadly balanced”, a slight change from its statement on June 2 when it said risks to that target “were tilted to the upside.”

However, the central bank also highlighted “a sustained hardening” of inflation outside of food and fuel as “most worrisome.”

The RBI had this year set a broad target of 2 to 6 percent for consumer inflation.

Indebted Indian companies are pressing for interest rates to be reduced further, and the RBI is unhappy that commercial banks have delayed reducing lending rates.

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