No surprises here.
The Reserve Bank of India, or RBI, has left its key rates unchanged.
The RBI has cut the base rate twice since January 2015 and was unlikely to further reduce it this time.
The central bank had lowered its policy rate by 25 basis points to 7.5% on March 4, after a similar cut on January 15, on the back of softening inflation and the government's commitment to continue with the fiscal consolidation programme. Repo rate is the rate at which the central bank lends to banks.
Since both these cuts were announced outside RBI's regular policy review, it was fairly obvious that the central bank would not go for one more cut.
The consumer price index rose 5.37% in February, marking a fifth consecutive month of staying within the RBI's target of 2-6%. However, the unseasonal rainfall in parts of the country has 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.
What would have been good is a cut in the cash reserve ratio, or CRR, which currently stands at 4%. This is the proportion of deposits banks need to hold with the RBI. This would instantly release more funds into the banking system and would give banks more leeway to offer rate cuts, which can be passed on to borrowers.
RBI's stance going ahead
Going forward, the central bank has stated that an accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data.
First, the Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates.
Second, developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the RBI stays vigilant to any threats to the disinflation that is underway. The apex bank will look through both seasonal as well as base effects.
Third, the RBI will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land.
Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.
Finally, the Bank will watch for signs of normalisation of the U.S. monetary policy, though it anticipates India is better buffered against likely volatility than in the past.
To read in detail, click here.
