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Reserve Bank of India Monetary Policy Announcement: Central Bank Leaves Key Interest Rates Unchanged

The Reserve Bank of India (RBI) maintained an accommodative stance in its latest policy review, although the central bank was reported to be keeping a watchful eye on the recent commodities selloff, sluggish global growth forecasts, and China’s ongoing moderation.

The move to leave several key policy rates unchanged was largely in line with what many industry analysts and economists had predicted. Most notably, the central bank left its key benchmark repurchase rate at 6.75 percent.¹ Following the decision, bond yields went up to their highest levels since August 2015 and the yield on sovereign bonds due in May 2025 climbed six basis points to close at 7.85 percent in Mumbai, according to prices from the RBI’s trading platform.1 Bond prices move inversely to yields and interest rates.

Vikas Gautam, CEO and Head of Global Offshore Business at Aditya Birla Sun Life Asset Management headquartered in Mumbai, offered up positive commentary on the central bank’s move saying, “The RBI continues its accommodative stance while awaiting further data on the inflation front before acting. Structural reforms [slated to be announced] in the upcoming Union Budget are expected to boost growth while keeping spending in check, [and] will also create more space for monetary easing ensuring that inflation remains on the projected path of 5 percent by the end of 2016-17.”2

The RBI has so far successfully managed interest rates leading to India’s economy becoming the world’s fastest-growing in 2015. The World Bank predicts India will maintain this position in 2016, at a growth rate of 7.8 percent.3

RBI successfully managed interest rates chart Source: World Bank

The central bank cut interest rates by 125 basis points in 20154 also surprised market onlookers in January 2016, when it announced that it would be purchasing 100 billion rupees of government bonds, yet another measure to help stimulate the economy and capital markets.5 India has maintained its standing as a bright spot in global markets due to strong macro factors including steady disinflation, a modest current deficit and a commitment to fiscal rectitude.

1Bloomberg Business, India Bond Yield Rises to Highest Since August as RBI Holds Rate, February 2, 2016.
2Aditya Birla Sun Life Asset Management.
3Wall Street Journal, India Leads World Bank Growth Forecast Amid Global Economic Heavy Weather, January 8, 2016.
4 Bloomberg Business, Why Fund Managers Love Indian Bonds, January 3, 2016.
5 Reuters, RBI announces open market bond purchase, second in a month, January 18, 2016.


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