RBI Monetary Policy Review - Feb 2' 2016

1. RBI keeps repo rate unchanged at 6.75%
In line with the market expectations, the Reserve Bank of India (RBI) left the key policy repo rate unchanged at
6.75%. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) remains at 5.75%. While
awaiting more data on the development of inflation, Central bank would also like to keep an eye on forthcoming
Union Budget before taking any action on rate cut. Marginal standing facility (MSF) rate, determined at a spread
of 100 basis points above repo rate, stands at 7.75%, while bank rate also remains at 7.75%. Cash reserve ratio
(CRR) kept unchanged at 4.00% of net demand and time liabilities (NDTL) of bank.
RBI Monetary Policy
Policy Backdrop
Keeping inflation battle at the top of its agenda, the RBI is of the view that Inflation has evolved closely along
the trajectory set by the monetary policy stance and the January 2016 target of 6% will be met. The RBI
expected that inflation is likely to be around 5% by FY17 under the assumption of a normal monsoon and the
current level of international crude oil prices and exchange rates. Though the apex bank did not factored in
the effect of implementation of the VII Central Pay Commission award, which could impart upward
momentum to inflation over the period of one to two years.
Economic growth front, the RBI expected that industrial activity is likely to remain subdued in the near term
due to weak exports and high base effect, however pick-up in corporate profitability on the back of declining
input costs may offset this issue. Prospects for the rabi harvest are improving slowly and some segments of
services sectors are likely to gain momentum on expectations of higher activity in coming months. RBI kept
key policy rate unchanged at 7.4% for FY16 with a downside bias.
Furthermore, it added that Indian economy is currently being viewed as a beacon of stability because of the
steady disinflation trend, a modest current account deficit and commitment to fiscal rectitude. Policy action
of RBI is orientated towards stable and sustainable growth while keeping inflation pressure under check.
Forecasting 7.6% growth rate for FY17, the RBI is of the view that growth in Indian economy expected to
strengthen gradually with the likelihood of a normal monsoon after two consecutive years of rainfall
deficiency, improving real incomes of households and lower input costs of firms.
SEBI Registered – Research Analyst Satish Kumar
Source: RBI
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Feb 2, 2016
7.25% 6.75%
6.25% 5.75%
4%
4%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
RBI's Monetary Policy Stance
Repo Rate Reverse Repo Rate CRR