RBI maintains status quo ; Growth projection for 2015-16 unchanged at 7.4 percent

In line with market expectations RBI maintained status quo by keeping key policy rates unchanged  as widely expected , after consumer price inflation rose to a four month high and as the emerging markets brace for a hike is US interest rates.But the RBI did keep the doors open for further accommodation based of the incoming data and global outlook.

In the RBI's latest assessment global growth continues to be weak. Global trade has slowed further with waning demand and oversupply in several primary commodities and industrial materials. The Global economy is likely to remain weak due to waning demand and over capacity. On the domestic front, the GDP data released yesterday for Q2 FY2015-16 rose on the back of acceleration in industrial activity. According to RBI assessment, lead indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness. RBI forecasts agricultural growth in 2015-16 to be moderate at this juncture.

The Index of Industrial Production picked up in the second quarter. RBI order books, inventories and capacity utilisation survey indicate that there was robust growth in new manufacturing orders in the second quarter. Urban consumption is showing signs of a pick-up in some areas, whereas rural demand has been weakened by two consecutive deficient monsoons and slowing construction activity. As anticipated in the previous policy, the consumer price index (CPI) increased for the third successive month in October 2015. Food inflation rose sharply in October, driven especially by pulses. In the external sector, exports contracted for the eleventh month in a row till October, indicative of the persisting weakness in global trade.

Reserve Bank remains confident that the inflation target for January 2016 at 6 per cent remains within reach. Accordingly, it front-loaded its policy action in response to weak domestic and global demand that were holding back investments, while noting that structural reforms and productivity improvements would continue to provide the main impetus for sustainable growth. According to RBI, inflation has turned up as anticipated, and is expected to rise further until December before plateauing. Although the seasonal moderation in prices of vegetables and fruits is expected to provide some respite.

On oil prices, RBI expects it to remain at low levels for a few more quarters. The rise of CPI inflation excluding food and fuel for two months in succession warrants vigilance according to the Reserve Bank. According to the statement, inflation is expected to broadly follow the path set out in the September review with risks slightly to the downside.The outlook for agriculture remains subdued in view of both rabi and kharif prospects being hit by deficient monsoon. RBI expects step-up in public capital spending and the easing stance of monetary policy provide the enabling environment for a revival in private investment.The growth projection for 2015-16 has accordingly been kept unchanged at 7.4 per cent with a mild downside bias.

In the coming months, Reserve Bank will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments. The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations.

Since the rate reduction cycle that commenced in January, is less than half of the cumulative policy repo rate, reduction of 125 bps has been transmitted by RBI to banks. The median base lending rate has declined only by 60 bps. Given this, the central bank stressed the need for further monetary transmission to the end user and is now coming up with a new methodology for determining the base rate based on the marginal cost of funds, which all banks will move to. This is the predominant reason even after RBI maintaining status quo the markets cheered this new development as this would bring down the borrowing costs. In addition, the on-going clean-up of bank balance sheets will help create room for fresh lending. The Reserve Bank projected inflation to 5 per cent by March 2017.