The Reserve Bank of India (RBI) on Tuesday kept key interest rates unchanged in the fifth bi-monthly monetary policy review. The RBI status quo was widely anticipated by the market participants.
Repo and reverse rates stood at 6.75% and 5.75% respectively. At the same time, cash reserve ratio (CRR) and statutory liquidity ratio (SLR) retained at 4% and 21.5% respectively.
The RBI Governor, Raghuram Rajan said, 'Since the fourth bi-monthly statement of September 2015, global growth continues to be weak. Global trade has slowed further with waning demand and oversupply in several primary commodities and industrial materials.'
The Indian economy grew 7.4% in Q2FY16 on the back of acceleration in industrial activity. Other indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness. The exports contracted for the eleventh month in a row in October, indicative of the persisting weakness in global trade.
The RBI assessed that the inflation target for January 2016 at 6% was within reach. Accordingly, the central bank front-loaded its policy action in response to weak domestic and global demand that were holding back investment, while noting that structural reforms and productivity improvements would continue to provide the main impetus for sustainable growth.
'The outlook for agriculture is subdued, in view of both rabi and kharif prospects being hit by monsoon vagaries. While there are areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand holds back stronger overall growth,' the Governor added.
The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the RBI's future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path.
The RBI will follow developments on commodity prices, especially food and oil, even while tracking inflationary expectations and external developments. Using this space for further accommodation, the bank expects inflation at around 5% by March 2017.
