Dalal Street Investment Journal

RBI Maintains Status Quo

The Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday (4th August), kept both the Repo rate (7.25 per cent) and the Cash Reserve Ratio (CRR – 4 per cent) unchanged. Also, the reverse repo rate will remain unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent.

The global economic activity has recovered modestly in the Q2 of calendar 2015. In India, the economic recovery is still work in progress. After strong rainfall in June, July has been below par, but on net, the monsoon is near normal.

The consumer price index (CPI) inflation rose for the second successive month in June 2015 to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations.

Liquidity conditions have been very easy in June and July. A seasonal reduction in demand for currency and increased spending by Government coupled with structural factors.

The contraction in the exports in Q1 of 2015-16, both volume and value, was the steepest since Q2 of 2009-10. The sharp fall in international commodity prices - especially crude oil - compressed import payments, helping to narrow the trade deficit.

Several factors, however, could have a significant mitigating influence. These include the sharp fall in crude prices since June and the likelihood of this softness persisting in view of the global supply glut and expanding production by Iran; the welcome increase in planting of pulses and oilseeds and prospects of rainfall in August and September according to some forecasters; the effects of the Government’s current pro-active supply management to contain shocks to food prices, especially of vegetables, alongside its decision to keep increases in minimum support prices moderate.

Taking into account all this, the RBI Governor kept the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy. And on an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6 per cent.