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RBI reduced Repo Rate by 25 basis points!

2016-04-06


Recently in the First Bi-monthly Monetary Policy Statement, 2016-17, By Dr. Raghuram G. Rajan, Governor announced the policy for the FY 16-17. In the announcement of Monetary Policy, Monetary and Liquidity Measures announced. On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

1: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.75 per cent to 6.5 per cent; 2: reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016, while keeping the CRR unchanged at 4.0 per cent of net demand and time liabilities (NDTL).

3: continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality; and 4: narrow the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate to 7.0 per cent. The Bank Rate which is aligned to the MSF rate also stands adjusted to 7.0 per cent.

Since the sixth bi-monthly statement of February 2016, global economic activity has been quiescent. Perceptions of downside risks to recovery in some advanced economies (AEs) at the beginning of 2016 have eased, while major emerging market economies (EMEs) continue to contend with weak growth and still elevated inflation amidst tighter financial conditions.

World trade remains subdued due to falling import demand from EMEs and stress in mining and extractive industries. In the US, consumer spending was underpinned by a strengthening labour market, but flagging exports proved to be a drag on growth in Q4 and cloud the near-term outlook. In the Euro area, tailwinds in the form of aggressive monetary policy accommodation and still low energy prices have supported activity in an environment beset with uncertainties from the migrant crisis, intensifying stress in the banking sector, and possible Brexit.

While Japan escaped recession in Q4 of 2015, a combination of weak consumer spending, business investment and exports has slowed the economy in Q1 of 2016. In China, sluggish industrial production, contracting exports, capital outflows and substantial excess capacity in factories and the property market remain formidable headwinds, notwithstanding significant monetary and fiscal policy stimulus.

EME commodity exporters have benefited recently from the firming up of commodity prices and risk-on investor sentiment has appreciated their currencies. Across EMEs, however, weak domestic fundamentals, lacklustre external demand and country-specific constraints continue to restrain growth.