Monetary Policy: 4 things that explain RBI's rationale - Alternative Media Forum


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Tuesday, 7 April 2015

Monetary Policy: 4 things that explain RBI's rationale

New Delhi,Shubhashish(dna): Reserve Bank of India (RBI) has decided to maintain repo rate at 7.5% and Cash Reserve Ratio (CRR) at 4.0% in its first bi-monthly monetary policy for the year 2015-16.

The Bank said that there has been an uneven global recovery and economies are being impacted by currency fluctuations and commodity prices.

RBI said that there are many upside risks to inflation at the moment including unseasonal rains, el niño conditions, larger than anticipated administered price revisions, geo-political developments leading to hardening of global commodity prices and spillover from external developments. "However, at this juncture, these upside risks appear to be offset by 4 downsides originating from global deflationary/disinflationary tendencies, the still soft outlook on global commodity prices and slack in the domestic economy," the Bank said.

These are the four things that RBI said are the reason why an accommodative stance of monetary policy will be maintained:

First, the Reserve Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates.

Also Read: RBI Policy Day: Rajan says no repo or CRR cut

Second, developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway. The Reserve Bank will look through both seasonal as well as base effects.

Third, the Reserve Bank will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.

Also Read: RBI provides "accommodative" policy; says outlook for growth is improving gradually

Finally, the Reserve Bank will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past.

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