Unexpected Rate Cut by RBI

What happened in the 4th Bimonthly was unexpected. Looking at the market situation and the festive season ahead, this seems pretty fair from the customer point of view. We have seen Dr Raghuram Rajan taking decisions at the right time. Dr Rajan also expressed his belief in the Indian market at the time of Greece Crisis. This rate cut was welcomed by all and the Finance Minister was also seen happy. Now let us discuss the bimonthly review.

The Reserve Bank of India today cut its key repo rate by a bigger-than-expected 50 basis points (bps) to 6.75%, with inflation running at record lows and the economy in danger of slowing down. In the fourth bi-monthly Monetary Policy Statement for 2015-16, Governor RaghuramRajan also announced a downward revision, the second this year, in the Reserve Bank’s growth projection for the year—to 7.4 per cent from the earlier 7.6 per cent.

The Governor said that underlying economic activity remains weak on account of sustained decline in exports, rainfall deficiency and weaker-than-expected momentum in industrial production as well as investments. Surveys also show that business sentiment has been falling in recent quarters, he said. “In India, a tentative economic recovery is underway, but it is still far from robust.”

The inflation target set in the Monetary Policy Agreement, between the Modi Government and the Reserve Bank, of 6 percent for January 2016 will be achievable, Dr. Rajan said. Inflation would in fact be a shade lower at 5.8 per cent in January, he said.

Monetary and Liquidity Measures

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

a) Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect.

b) Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL)

c) Continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; andcontinue with daily variable rate repos and reverse repos to smooth liquidity.

d) Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.

Now after the review, the revised rates are:

Bank Rate- 7.75%

Repo Rate- 6.75%

Reverse Repo Rate- 5.75%

CRR- 4%

SLR- 21.50%

MSF- 7.75%