RBI Bi-monthly Credit Policy 2015-16: Live

RBI Bi-monthly Credit Policy 2015-16: Live

The Reserve Bank of India has slashed the repo rate by 25 basis points, as was widely expected. Key ratios, such as the CRR and SLR, are unchanged. The repo rate is now 7.25 percent. Consequently, the reverse repo rate moves lower to 6.25 percent.

In the statement, central bank Chief Raghuram Rajan says the risks to inflation, given some challenge on the monsoon and the recent bounce back in crude prices, remain. The RBI has upped its inflation target for January 2016 at 6 percent, higher than its recent 5.8 percent forecast.

The RBI chief also urged banks to pass through the sequence of rate cuts into lending rates.

From Raghuram Rajan's press conference, "We have done what we think is appropriate given the data. If the monsoon turns out to be better than forecast or government actions contain inflation risks, we will see later. Whatever room we had, we have made use of it. In fact, I would say we have erred slightly on the side of boosting investment.”

The RBI has downgraded FY16 gross-value added growth forecast from 7.8 percent earlier to 7.6 percent.

Replying to a question why banks are yet to transmit the full 50 basis point rate cut into lending rates till now, Rajan said that the banks' cost of funds was reducing steadily and that should reflect in rates soon.’

When asked about the RBI's decision to cut rates thrice this year, and to comment on rumors whether these were to "please the government", Rajan takes it laughingly in his stride. "It's a no-win situation, really," he says. "If I cut interest rates, it's because I want to please the government. If I don't, I'm having a fight with it."

The RBI monetary policy document revealed a grim picture of the agriculture sector.

“Contingency plans for food management, including storage of adequate quantity of seeds and fertilizers for timely supply, crop insurance schemes, credit facilities, timely release of food stocks and the repair of disruptions in food supply chains, including through imports and de-hoarding, need to be in place to manage the impact of low production on inflation,” the RBI said in the policy document.

"We had expected the monetary policy meeting to come up with dovish action, but aggressive guidance," says JPMorgan India chief economist Sajjid Chenoy. "It exactly happened like that."

The market, meanwhile, has sold off even more, now down about 1.4 percent. The Bank Nifty is badly hit.

"Everyone was expecting a 25 basis point cut, but they were hoping for 50 bps," Edelweiss chief Rashesh Shah tells CNBC-TV18, explaining the violent market reaction today. "Maybe the RBI is seeing something we don't. It could be seeing stagflation, which would be very harmful for corporate earnings."

The RBI's worry on oil price bounce back and a poor monsoon-led inflation perk-up may be overdone, says economist Taimur Baig.

"I am hoping the RBI is wrong," he says. "We believe much of the oil price bounce back is done. I am also confident about this government's food stock management ability, which will keep food prices in check even if monsoon turns out to be bad."

"As a result, I believe there is one more 25 basis point rate cut down the year."

To sum up, the Raghuram Rajan-led the Reserve Bank expectedly cut interest rates by 25 basis points today, but it was not enough to please the stock market, which fell sharply. This was largely thanks to what participants’ perceived as hawkish commentary going forward.

The bond market reaction, however, was more muted. Going forward, the central bank said future data on growth and inflation will drive its decisions on policy ahead. But it did raise its inflation forecast a bit, owing to worries on the monsoon and crude oil bounce back.

Some analysts, however, said stocks overreacted today and maintained that if inflation does not spike as expected, one more rate cut later this year could well be in the offing.

Macroeconomic conditions in most emerging markets remain challenging due to domestic fragilities, exacerbated by bouts of financial market turbulence.

Global financial markets have also been volatile due to changing perceptions of monetary policies in the advanced economies.

Domestic economic activity remains moderate in Q1 of 2015-16.

An estimated 94 lakh hectares of area sown under the rabi crop was adversely affected by unseasonal rains and hailstorms in March.

Outlook for Kharif season clouded by India Meteorological Department’s forecast of below average monsoon and by the confirmation of onset of El Nino by the Australian weather department.

Government’s contingency plans for food management crucial to limit the impact of low production on inflation. Also, increase in agricultural support prices need to be limited.

Industrial production recovering, albeit unevenly. Sustained weakness in consumption spending, especially in rural areas, continues to be a drag. Corporate sales have contracted.

Upturn in capital goods production underway; unclogging of stalled investment projects, fresh capex by private firms’ key to the trend sustaining.

Stained revival of coal output augurs well for electricity generation and mining. There is some optimism on gas pricing and availability.

Power purchase processes need to be expedited and power distribution companies’ financial stress addressed on a priority basis

Some public sector banks will need more capital to clean up their balance sheets and support lending as investment revives.

Lending indicators of services sector activity emitting mixed signals. Slowdown in tourist arrivals, railway traffic and international air passenger and freight traffic could affect hotels restaurants and transport firm.

Vegetables inflation continues to ease, along with that in cereals, oil, sugar and spices. Prices of protein items, especially milk and pulses, continue to rise.

Rural wage growth, although still moderate, picked up. Inflation expectations remain in high single digits.

Current account deficit is expected to be contained to about 1.5 per cent of GDP this year

Net exports unlikely to contribute as much to growth going forward as they did in the past financial year. Therefore, growth to depend more on a strengthening of domestic demand.

Foreign exchange reserves of around US$ 350 billion provide a strong second line of defense to good macroeconomic policies if external markets turn significantly volatile.

Assuming reasonable food management, inflation expected to be pulled down by base effects till August but to start rising thereafter to about 6.0 per cent by January 2016.

Weak monsoon, rising crude, volatility in global environment, pose upside risks to inflation