RBI keeps policy rates unaltered

The Reserve Bank of India (RBI) at the first bi-monthly monetary policy of 2016 on the basis of an assessment of the current and evolving macroeconomic situation left the key repo rate and Cash Reserve Ratio (CRR) unchanged at 6.75 and 4 per cent. The Statutory Liquidity Ratio (SLR) was also left unchanged.

The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation; a modest current account deficit; and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened.

Conclusively the Reserve Bank states that it continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17.

Going forward, under the assumption of a normal monsoon; and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and stand at around 5 per cent by the end of fiscal 2016-17. However, the implementation of the VII Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years.

The Reserve Bank will adjust the forecast path as and when more clarity emerges on the timing of implementation. Vagaries in the spatial and temporal distribution of the monsoon and the impact of adverse geo-political events on commodity prices and financial markets add additional uncertainty to the baseline.

For 2016-17, growth is expected to strengthen gradually, notwithstanding significant headwinds. Based on an assessment of the balance of risks, GVA growth for 2016-17 is projected at 7.6 per cent.