Fourth Bi-monthly Monetary Policy Statement 2015-16 announced; Repo rate cut by 0.50 percent

Fourth bi-monthly monetary policy statement 2015-16 was announced on 29 September 2015 by Raghuram Rajan, the Governor of Reserve Bank of India (RBI).

The monetary policy cut the repo rate, the rate at which RBI lends to commercial bank, by 0.50 percent from 7.25 percent to 6.75 percent with immediate effect.

As a result, the reverse repo rate, the rate at which RBI borrows from commercial banks, stands adjusted to 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.

However, the cash reserve ratio (CRR) of scheduled banks was kept unchanged at 4 percent of net demand and time liabilities (NDTL).

Further, RBI will continue to provide liquidity under overnight repos at 0.25 percent 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 percent of NDTL of the banking system through auctions; and continue with overnight/term variable rate repos and reverse repos to smooth liquidity.

Comment

The RBI lowered the repo rate against the backdrop of deflationary tendencies-lowering inflation and decelerating nominal GDP-in the economy.

As the headline consumer price index (CPI) inflation reached its lowest level in August 2015 since November 2014, except high prices of onion and pulses, and is expected to reach 5.8 percent in January 2016 the RBI shifted its focus to augmenting supply side economic activity.

As a result, the repo rate was decreased by 50 basis points or 0.50 percent to give boost to the decelerating merchandise exports and increase the investor confidence on the Indianeconomy amidst sluggish growth trends across the world.

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