India Monetary Policy – August 2016

The RBI held the policy (Repo) rate at 6.5%, as expected. NAB Economics is forecasting a 25bp cut in rates to 6.25% in the December quarter, on expectation of softer food prices.

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The RBI held the policy (Repo) rate at 6.5%, as expected. NAB Economics is forecasting a 25bp cut in rates to 6.25% in the December quarter, on expectation of softer food prices.

However, there are still upside risks to the inflation outlook. The passage of the GST Bill is a landmark decision, which should improve India’s medium-term growth potential.

Monetary policy decision

The 9th August meeting was the last presided by the current Governor, Dr. Rajan. At the meeting, the RBI maintained the status quo. The policy (Repo) rate was held at 6.50%, and the Reverse Repo and Marginal Standing facility rates were maintained at 6% and 7%, respectively. Further, the RBI committed to provide liquidity as required, which should assist in improved monetary transmission. Indian banks have thus far passed around 90bps of the 150bps cuts by the RBI.

The decision was anticipated by both NAB Economics and the markets. This can be attributed, in part, to the recent acceleration in consumer prices, which rose by 6.1% in July, a recent high. This was driven largely by rising food prices, particularly for pulses and vegetables. This has fed into higher household inflation expectations for the year ahead, which rose to 9.6% in June 2016, up from 9.4% in March.

For further details, please see the attached document.