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Second Bi-monthly Monetary Policy Statement 2015-16 announced; Repo rate cut by 0.25 percent

As a result, the reverse repo rate, the rate at which RBI borrows from commercial banks, stands adjusted to 6.25 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.25 per cent.

Jun 4, 2015 15:16 IST
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Second bi-monthly monetary policy statement 2015-16 was announced on 2 June 2015 by Raghuram Rajan, the Governor of Reserve Bank of India.

The monetary policy cut the repo rate, the rate at which RBI lends to commercial bank, by 0.25 percent from 7.5 percent to 7.25 percent with immediate effect.

As a result, the reverse repo rate, the rate at which RBI borrows from commercial banks, stands adjusted to 6.25 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.25 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 cut in repo rate by RBI suggests that all is not well with the Indian economy and on a serious note it highlights that growth numbers brought out by Central Statistics Office (CSO) is not trustworthy. This is because if Indian economy is predicted to grow at 7.3 percent in 2014-15 (provisional estimate) and is expected to surpass the China’s growth, then what is the need for a rate cut?

The very fact RBI chose to cut rates, while simultaneously raising the retail inflation forecast from 5.8 percent to 6 percent by January 2016 (highlighting the risk factors from a deficient monsoon), proves that from the RBI’s point of view, the growth is faltering and is certainly a bigger risk than inflation at this stage.

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