REFORMS TO TAG ALONG WITH RECAP, SAYS RBI

■ Raises inflation projection range to 4.3- 4.7% for H2

As expected the RBI on Wednesday kept the repo rate unchanged at 6 per cent citing upside risk to inflation from food and fuel prices. While maintaining its neutral stance on monetary policy outlook, the Reserve Bank has raised upwards its inflation projection to 4.3 – 4.7 per cent from its previous forecast of 4.2- 4.6 per cent for the second half of this fiscal year.

However, RBI retained its growth outlook for FY18 at 6.7 per cent despite the second quarter growth remaining lower than its estimates as it believes that the several reforms initiated by the government would help create a conducive environment for nurturing higher growth in the medium to long term.

“While arriving at this decision, the monetary policy committee ( MPC) took note of the upside pressures from food and fuel prices on evolving cost of living conditions and inflation expectations. Our survey indicates that corporates are also contending with rising input cost conditions, and higher risks of pass through to retail prices in the near term. In addition, the committee expressed concerns about the implications for the inflation outlook from possible fiscal slippages and global financial instability heightening asset price volatility,” said Urjit Patel, governor, RBI.

Noting that the moderation in inflation excluding food and fuel observed in Q1 of FY18 has, by and large, reversed, RBI said there is a risk that this upward trajectory may continue in the near- term.

Additionally, the impact of house rent allowance by the central government is expected to peak in December.

The staggered impact of

HRA increases by various state governments may push up housing inflation further in 2018.

On its outlook on growth, RBI expressed optimism regarding a recovery in the coming quarters as credit growth has picked up in recent months and the recapitalisation of PSBs is expected to help further The RBI on Wednesday said that the recapitalisation plan announced by the government to shore up the balance sheet of public sector banks ( PSBs) would be accompanied by governance reforms including the sale of non- core assets.

“Governance reforms for all PSBs will also feature as part of the plan. This will be a reform and recap package and not just recap package so as to ensure that these money is used to strengthen PSB balancesheets and that we don’t sow seeds of the next boom and bust cycle of lending,” said Urjit Patel. He added that the final details would be announced soon by the finance department.

In October, the government announced ` 2.1 lakh crore capital infusion plan for ailing public sector banks that includes ` 1.35 lakh crore through issue of bonds, ` 18,000 crore from the Budget and the remaining ` 58,000 crore through share sales.

Mr Patel informed that the RBI is working closely with the government to finalise the extend of funding to be raised by banks and the amount of recapitalisation bonds to be placed on banks balance sheet as government’s equity contribution. However, he added that the plan would be differentiated across banks. “In particular, the recap bonds will be front loaded for banks that have managed their balance sheet strength more prudently and can use injected capital to lend besides providing for legacy asset losses,” he added.