RBI keeps repo rate unchanged at 7.25%

In a press release, RBI said it has decided to keep the policy repo rate unchanged on the basis of an assessment of the current and evolving macroeconomic situation. The central bank has also kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL).

RBI said it will continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions. It will also continue with daily variable rate repos and reverse repos to smooth liquidity.

Accordingly, the reverse repo rate under the LAF will remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent, the release said.

In its assessment since the last bi-monthly statement, RBI said global economic activity has recovered modestly in Q2 of calendar 2015.

In India, the economic recovery is still work in progress. After strong rainfall in June, July has been below par, but on net, the monsoon is near normal. Higher reservoir levels also auger well for the prospects of kharif output, particularly for areas that are dependent on irrigation. Consequently, kharif sowing has expanded significantly relative to a year ago, especially in respect of oilseeds, pulses, rice and coarse cereals.

These developments, supported by contingency plans for vulnerable districts, provide cushion against adverse weather shocks. If prospects of a good harvest strengthen, currently weak rural demand will improve to provide an important boost to activity.

Shrinking exports in some industries, in part a result of weak global demand and global overcapacity in those industries and in part a result of the significant depreciation of currencies of some major trading partners against the rupee, also contributed to weak aggregate demand.

The Reserve Bank's survey-based indicators point to flat capacity utilisation and new orders, with corporate sales growth declining – although lower inflation explains some of the compression in top lines. Although overall business confidence is positive, the level of optimism was a shade lower in April-June than in the preceding quarter, RBI said.

Investment, as measured by new projects, is still weak, primarily because of still-low capacity utilisation. In the critically important power sector, where final demand is strong, the recent step-up in generation in response to the commendable easing of bottlenecks in coal supply is being partly negated by structural problems relating to clogging of transmission grids and the dire financial state of electricity distribution companies (DISCOMs).