India's Reserve Bank leaves policy rates, reserve ratios unchanged

Mumbai, April 7: The Reserve Bank of India (RBI) on Tuesday made it clear that it will cut interest rates further only if it sees more robust containment of prices and commercial banks lowering the cost of housing, auto and corporate loans.

RBI Governor Raghuram Rajan, who conducted the first bi-monthly review of the monetary policy for the current fiscal year, decided to retain the repurchase rate, the reverse repurchase rate, the cash reserve ratio and the statutory ratio at existing levels.

He also projected a 7.8 percent growth for the current fiscal year, subject to a normal monsoon - over which the RBI was worried - as also an inflation rate of 5.8 percent by the end of the year, after easing to around 4 percent by August.

Rajan said the Reserve Bank adopted an accommodative policy stance since January, ensuring comfortable liquidity in the system. “Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data.”

“For monetary transmission to occur, lending rates have to be sensitive to the policy rate,” Rajan said, expressing confidence that the Indian economy will rebound, notably in the manufacturing sector, while also nudging commercial banks to play their part.

Accordingly, the repurchase rate and reserve repurchase rate have been maintained at 7.5 percent and 6.5 percent respectively while the cash reserve ratio and the statutory liquidity ratio have been left untouched at 4 percent and 21.5 percent.

The repurchase rate is the interest commercial banks pay for borrowing money from the central bank to meet short-term fund requirements. The reverse repurchase rate is the interest central bank pays when surplus short-term funds are parked with it by commercial banks.

The RBI cut its repurchase rate by 25 basis points on January 15 and on March 4. Accordingly, the reserve repurchase ratio also stood adjusted by an equal margin. The cash reserve ratio has remained unchanged since 2013, while the RBI brought down SLR by 50 bps in February 2015.

On regulatory front, the RBI enhanced retail investor’s access to the government-backed securities and permitted Indian companies to issue rupee-denomited bonds overseas.

It also permitted market-linked compensation for non-executive directors of banks. India Inc. has expressed its disappointment over the RBI decision.

The Federation of Indian Chambers of Commerce and Industry (FICCI) said it was hoping for a continuation of the rate cut cycle by the RBI in its first monetary policy review for 2015-16.

“Of greater concern to industry is the fact that the transmission of the rate cuts introduced earlier by the RBI has not happened at the level of the banks,” said Jyots Suri, FICCI president.

Confederation of Indian Industry (CII) president Ajay S. Shriram said the RBI decision reflects a very cautious approach towards anchoring inflatiory expectations.

Shriram pointed out that the RBI had enough space to cut rates, given the fact that there has been a drastic decline in crude oil and commodity prices.

“A cut in policy rates even by a modest 25 basis points would have been a mood elevator and propelled industry and consumers to augment demand,” said Shriram.

The markets which had factored in the possibility of an unchanged policy rates also reacted negatively. (IANS)