The Reserve Bank of India (RBI) kept its policy rates on hold at 7.25 per cent on Tuesday, as widely expected. It left the door open to ease the rates further depending on the inflation in future and how swiftly banks lower their lending rates. Since the start of the year, rates have decreased by 75 basis points. One basis point is one-hundredth of a percentage point. The cash reserve ratio (CRR), or the proportion of deposits banks have to hold as cash with RBI, remains at 4% . The statutory liquidity ratio (SLR), or the proportion of deposits banks have to hold in liquid instruments stands at 21.5%. Soon after the policy was announced, Delhi-based Oriental Bank of Commerce reduced rates in two of its short-term deposit by 25 basis points each.
State Bank of India Chairperson, Arundhati Bhattacharya ruled out rate cuts in the immediate future and said future rate cuts will depend on the economic growth and credit growth, and the bank’s ability to make profits from treasury operations. ICICI Bank Ltd’s Managing Director and Chief Executive Officer, Chanda Kochhar expects to see easing of rates over a period of time as further transmission of accommodative monetary policy takes place. RBI governor Raghuram Rajan once again scolded banks for not lowering their lending rates, but he also admitted that transmission takes time. Rates will eventually have to come down and that may happen after September.
In its policy statement, RBI noted that relative to the projections in the June policy. The RBI said that it is prudent to keep the policy rate unchanged at the current moment while maintaining the accommodative pose of the monetary policy. They must take advantage of the circumstances to bring inflation down once and for all. If they can bring down inflation with only a light cost to output they would have done an extremely good favour to the economy.
Soon after the RBI announcement, the yield on the 10-year standard bond rose to 7.797% from 7.788% before the policy. Bond prices and yields move in opposite directions. The 10-year benchmark bond yield closed at 7.84%. The rupee closed at 63.75 a dollar compared with 63.99 before the policy announcement. Industry lobby group Confederation of Indian Industry said RBI should have cut rates as that would have sent a strong signal that the central bank is aggressively addressing growth risks in the economy.
Favourable real income effects could ensue from weaker commodity prices, in particular crude oil and a possible step-up in agricultural activity if monsoon conditions continue to improve. Professional forecasters polled by RBI expect economic growth in 2015-16 to be 7.6%, down 0.2% from the previous round.
