5 Takeaways From The RBI Monetary Policy

Updated: Tuesday, August 4, 2015, 15:55 [IST]

The Reserve Bank of India (RBI) today held interest rates steady in its policy meet and also kept the CRR unchanged. Here are quick takeaways from the RBI Policy.

1) Repo rate steady at 7.25 per cent

5 Takeaways From The RBI Monetary Policy

The Reserve Bank of India (RBI) kept the repo rate or interest rates steady for two reasons. One was that it continued to worry on the CPI inflation front and second was that it had already front loaded interest rates. This was quite apparent from the central bank's press release. Keeping repo rate steady did not surprise analyst as the move was largely expected.

2) CRR remains at 4%

The RBI also kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent. This was largely on account of good liquidity conditions in the banking system. CRR is the amount of cash that banks have to keep with the RBI. When that is cut it allows banks to lend more money.

3) Disappointment over transmission of rate cuts

The RBI seemed to suggest that transmission of previous rate cuts is not happening. The RBI noted that base rates have gone down by 30 basis points, while interest rate cuts by the RBI since Jan has been 75 basis points. This means when RBI has cut interest rates by 0.75 per cent, banks have not passed the entire rate cuts onto customers.

4) Inflation worry remains

"Turning to the balance of inflation risks, most worrisome is the sustained hardening of inflation excluding food and fuel. Moreover, the full effects of the service tax increase, which took effect from June, will feed through over the rest of the year. Some food prices, particularly of protein-rich items, pulses and oilseeds have risen sharply in recent months," the RBI has observed.

The tone of the RBI on inflation sounded more hawkish than before.

5) Growth outlook improving

The outlook for growth is improving gradually, according to the RBI. "Favourable real income effects could accrue from weaker commodity prices,in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve. On the other hand, global growth projections for 2015," the RBI has said in a release.

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