India's central bank on Tuesday kept its key policy rates and the reserve ratios unchanged in line with the predictions while awaiting more robust data on inflation and action from commercial banks to soften their cost of credit to alter its stance.
Reserve Bank of India 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, while expressing confidence that the Indian economy wil rebound, notably in the manufacturing sector, while also nudging commercial banks to play their part."The outlook for growth is improving gradually. Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy."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 cash reserve and statutory liquidity ratios are the minimum mandated amounts of money against the deposits that commercial banks have to retain in the form of liquid assets. A change in this has a direct impact on the money available to banks to extend loans and other advances.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 had brought down SLR by 50 bps in February 2015. In January and March, when RBI cut its rates, banks did not reduce their base rates.
Meanwhile, markets which had factored in the possibility of an unchanged policy rates reacted negatively. The 30-scrip BSE Sensitive Index (Sensex) plunged over 150 points just after the policy announcement was made public.The Sensex of the S&P Bombay Stock Exchange (BSE), which opened on Tuesday at 28,582.33 points, was trading at 28,353.82 points (12.00 p.m.) in the morning trade session, down 150.64 points or 0.53 percent from the previous day's close at 28,504.46 points.The Sensex touched a high of 28,641.08 points and a low of 28,342.98 points in the intra-day trade so far.