India’s central bank slashed its key repo rate by 50 basis points to 6.75% at its September policy meeting, describing the decision as a “front-loaded policy action” that was twice the size expected by the markets.
The bank also lowered its reverse repo rate by 50 basis points to 5.75% while leaving the cash reserve ratio for banks unchanged at 4% in a move that was widely expected by markets.
The benchmark lending rate is now back to levels last seen in April 2011.
In the accompanying monetary policy statement the bank noted that “since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies, global trade has deteriorated further and downside risks to growth have increased”.
Reflective of the caution expressed by the US Federal Reserve when it decided to leave rates unchanged at its September FOMC policy meeting, the RBI expressed concerns about recent developments within the Chinese economy.
“China’s intended rebalancing from investment towards consumption is being hit by the stock market meltdown,” it noted.
“Slower industrial production and weaker exports. The devaluation of the renminbi on August 11, while mild, has unsettled financial markets across the world”.
On developments in the Indian economy, they stated that “a tentative economic recovery is underway, but is still far from robust”.
Moderating inflationary pressures, along with the failure of many Indian lenders to pass on previous rate reductions, may have been behind the larger-than-expected rate cut to benchmark rates announced by the board today.
“The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June,” they noted.
“Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank.”
The bank also suggested that along with maintaining accommodation monetary policy, they will also work with the government to assist the nation’s lenders to pass on lower interest rates to businesses and consumers.
“While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed”.
On the outlook for consumer prices, the board noted that “the focus should now shift to bringing inflation to around 5 per cent by the end of fiscal 2016-17”. The bank forecasts CPI to average 5.5% between October to December 2015 before accelerating to to around 5.8% between January and March 2016. Looking further out, they forecast inflation to average 5.5% in fiscal year 2016/17 before moderating to 4.8% in the first quarter of 2017.
The bank’s projections for CPI are shown in the chart below.
They also cut their forecast for economic growth, lowering the output growth projection for 2015-16 to 7.4% from 7.6% seen previously.
“With global growth and trade slower than initial expectations, a continuing lack of appetite for new investment in the private sector, the constraint imposed by stressed assets on bank lending and waning business confidence, output growth projected for 2015-16 is marked down slightly to 7.4% from 7.6% earlier.
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