RBI keeps policy rates unchanged in monetary policy review meeting

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The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai July 30, 2013. IREUTERS/Vivek Prakash/Files

Reserve Bank of India, RBI India’s central bank which controls the monetary policy in its recent bi-monthly monetary policy review meeting kept its policy rates unchanged at 7.25% and announced that it may eventually come down after September. The cash reserve ratio (CRR)  which refers to the proportion of deposits  that  the commercial banks have to hold as cash with RBI remains as 4% and the statutory liquidity ratio (SLR), the proportion of deposits  that the commercial  banks have to hold in liquid instruments (gold, cash, government bonds) is 21.5%.

At the start of this year RBI reduced its rates by 75 basis points where one basis point is equal to one-hundredth of a percentage point. Arundhati Bhattacharya, Chairperson of State Bank of India said that future rate cuts will depend on the economic and credit growth of the country and the bank’s ability to make profits from treasury operations and its desire to pass a rate that benefits its customers.

RBI governor Raghuram Rajan in the monetary policy review meeting acknowledged that transmission to a different monetary policy will take time. The monetary policies cannot be changed suddenly at a point of time. For that a clear forecast on what is going to happen in the economy for three-four quarters down the line should be done. When there is a change in the rate its action gives a signal that signal then gets turned into efficient plan which then down the line turns into an activity that may affect the economy.

RBI noted that the demand for products is increasing particularly in the urban areas. To have a gear on this better credit availability to customers is necessary. If the monsoon will be normal there will be prospects of a good harvest which strengthen the weak rural demand and provide a boost to economic activity.

Professional forecasters of RBI expect an economic growth of 7.6% in 2015-16 and 8.2% in 2016-17. Mr.Rajan also added that it is wise to keep the policy rate unchanged as the inflation projections are higher than expected rates and steps  must  be taken to bring inflation down  so as there will be a mild cost to outputs which will be extremely good for the economy. Soon after the RBI announcement that there will be no change in its rates the yield on the 10 year benchmark bond rose to 7.797% from 7.788% before the policy. The value of rupee closed at 63.75 a dollar which was 63.99 before the policy announcement.

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