Rajan says Pause! RBI maintains status quo on rate cut, keeps repo rate at 6.75%

This is largely in line with the market expectations, as the central bank keeps a keen eye on the Union Budget due on 29th February, before taking any decision that would rattle the market participants.

The Reserve Bank of India (RBI), in its Sixth Bi-monthly Monetary Policy Review, 2015-16, has decided to keep the repo rate same, with no pulls or pressure from the market. Governor Raghuram Rajan declared that the Repo Rate will be maintained at 6.75%, with CRR at 4%. Reverse Repo Rate is held at 5.75%.

This is largely in line with the market expectations, as the central bank keeps a keen eye on the Union Budget due on 29th February, before taking any decision that would rattle the market participants. The stance is akin to the policy statement from the Fifth Bi-monthly meet which reiterated that the global growth continues to be weak.

In its official statement, RBI said, "Since the fifth bi-monthly statement of December 2015, global growth has slowed, with the ongoing weakening of activity in major emerging market economies (EMEs) outweighing the recovery in some advanced economies (AEs). World trade has remained subdued, held down by anaemic demand, new lows in commodity prices and currency realignments."

"On the domestic front, economic activity lost momentum in Q3 of 2015-16,
pulled down by slackening agricultural and industrial growth. The north-east monsoon season ended in December with a deficiency of 23 per cent relative to the long period average (LPA)." the central bank added.


The Indian central bank cut policy rates by a cumulative 125 basis points in the last calendar year. Slowing economic conditions definitely warrented further fall in the interest rates but growing concerns over fiscal prudence and rise in food inflation has poured water on such possibility.

On growth front, Indian government downwardly revised GDP estimates for the current fiscal year. GDP projection for FY2015-16 is lowered to 7.2% from 7.3% reported earlier. Few quarters back, the Finance ministry expected the economy to grow around 8%. Growth numbers for the previous fiscal year (FY2014-15) has also been lowered to 6.6% from the earlier estimate of 6.9%.

On inflation side, retail inflation during December has moved higher towards 5.61%, when compared with the reading of 5.41% and 5% during November and October respectively. Erratic monsoon has adversely impacted the output of grains, pulses and other crops and in the process led to higher food prices.

There is skepticism on whether the incumbent regime will be able to meet the fiscal deficit of 3.9% by the end of this fiscal year. Fiscal deficit for the April-December 2015 period stands at 87.9% of FY2015-16 target. Recent hike in salaries and pensions of Central government employees can impair the plans of attaining budgetary targets.

Meanwhile, trajectory in oil prices has worked in the favor of Indian economy. Considering India’s dependence on oil imports, falling energy prices has proved as a boon for the nation’s current account balance. In the latest, India’s current account deficit narrowed to 1.6% of GDP during the second quarter of the FY2015-16, when compared with the reading of 2.2% the same quarter last year. Nevertheless, India’s trade deficit rose to US$11.7bn in December 2015, compared to US$9.1bn a year ago, as merchandise exports during December fell for the 13th successive month on account of weak global demand and competition from depreciating emerging market currencies. Exports fell 14.75% on yoy basis to US$22.3bn, while imports were reported at US$33.96bn.