RBI Cuts Rate 25 Bps, But Doesn’t Ease Its Stance

The Economic Times - - Front Page - Our Bu­reau

Mumbai: The Re­serve Bank of In­dia (RBI) cut the key in­ter­est rate by a quar­ter point to 6% as ex­pected with­out chang­ing its stance, say­ing that it would re­main on guard as price pres­sures may re­turn in the wake of a house rent allowance pay­out and the July 1 roll­out of the goods and ser­vices tax (GST). The Mon­e­tary Pol­icy Com­mit­tee (MPC) ad­mit­ted that its in­fla­tion ex­pec­ta­tions have not ma­te­ri­alised, but said it was dif­fi­cult to con­clude whether the eas­ing of price pres­sures was tem­po­rary or per­ma­nent in na­ture. It there­fore kept its stance at “neu­tral” in­stead of shift­ing to “ac­com­moda­tive”, which would have indi- cated more scope for the low­er­ing of rates in the months ahead. Four MPC mem­bers voted in favour of the 25 ba­sis point (bps) cut while one was in favour of a 50 bps re­duc­tion and the sixth wanted no change. A ba­sis point is 0.01 per­cent­age point. In an ET poll of 20 mar­ket par­tic­i­pants on the week­end, 17 had ex­pected a 25 bps re­duc­tion. The eco­nomic growth fore­cast was re­tained at 7.3% amid prospects of a bet­ter har­vest even though the in­dus­trial sec­tor con­tin­ues to strug­gle, which is partly due to a debt over­hang. In­fla­tion pro­jec­tions have been low­ered marginally to just above 4%, from the top end of the band of 4.5% fore­cast ear­lier.

Since “in­fla­tion is ex­pected to rise from the cur­rent lows over the rest of the year, the com­mit­tee per­se­vered with the neu­tral stance,” RBI gov­er­nor Ur­jit Pa­tel told re­porters. “With sev­eral fac­tors con­tribut­ing to un­cer­tainty around the base­line in­fla­tion path, im­ple­men­ta­tion of farm loan waivers, the af­ter-ef­fects of GST, the tim­ing of im­ple­men­ta­tion of salary and allowance re­vi­sions by state gov­ern­ments, the MPC em­pha­sised its com­mit­ment to keep­ing head­line in­fla­tion close to 4% on a durable ba­sis.”

This is the first cut in the repo rate — at which the cen­tral bank lends to banks — since Oc­to­ber 4 last year, which also hap­pened to be the in­au­gu­ral meet­ing of MPC. The cash re­serve ra­tio (CRR), the pro­por­tion of cash that banks have to keep with RBI, was kept un­changed. The bench­mark Sen­sex de­clined 0.3% to 32,476.74 points while the ru­pee rose to its high­est level in two years to 63.70 against the dol­lar. Ten-year gov­ern­ment bond yields rose two ba­sis points to 6.46%. “Given our ex­pec­ta­tion of both growth and in­fla­tion ris­ing over the next six to 12 months, we ex­pect a pro­longed pause from RBI,” said Sonal Varma, econ­o­mist at No­mura Se­cu­ri­ties. The gov­ern­ment, which has been ar­gu­ing for lower in­ter­est rates, was guarded in its re­sponse while ac­knowl­edg­ing the cut. “We wel­come the 25 bps cut in the repo rate as an im­por­tant step nec­es­sary to con­verge to­ward the ap­pro­pri­ate real mon­e­tary con­di­tions for sus­tained growth con­sis­tent with In­dia’s po­ten­tial and for sta­ble, mod­er­ate in­fla­tion,” said eco­nomic af­fairs sec­re­tary Sub­hash Chan­dra Garg.

In­fla­tion as mea­sured by the con­sumer price in­dex (CPI) fell to a record 1.54% in June, prompt­ing calls from the gov­ern­ment to lower in­ter­est rates. Chief eco­nomic ad­viser Arvind Subra­ma­nian had even ques­tioned the cred­i­bil­ity of RBI’s in­fla­tion fore­cast.

Fur­ther­more, the ar­gu­ment has been made by some crit­ics that In­dia’s real in­ter­est rate is the high­est in the re­gion and cou­pled with ru­pee ap­pre­ci­a­tion this year makes the mon­e­tary pol­icy a tight one.

“There are sev­eral fac­tors con­tribut­ing to un­cer­tainty around this base­line in­fla­tion tra­jec­tory,” the pol­icy said. “Im­ple­men­ta­tion of farm loan waivers by states may re­sult in pos­si­ble fis­cal slip­pages and un­der­mine the qual­ity of pub­lic spend­ing, en­tail­ing in­fla­tion­ary spillovers.”

The pol­icy state­ment is care­fully worded and doesn’t nec­es­sar­ily point to­ward which way rates could go.

“Ac­com­pa­ny­ing rhetoric is largely neu­tral, with­out giv­ing away par­tic­u­lar bias for the rate tra­jec­tory,” said Rad­hika Rao, In­dia econ­o­mist at DBS Bank. “The lat­ter will al­low RBI to be non-com­mit­tal on the fu­ture course of action, re­tain­ing the flex­i­bil­ity to re­act to the evolv­ing in­fla­tion tra­jec­tory.”

The cen­tral bank also showed that it is keen on bring­ing trans­parency to lend­ing in the mar­ket and also en­sure that rate re­duc­tions are passed on to con­sumers.

“RBI’s de­ci­sion to set up a high-level task force for cre­at­ing a trans­par­ent, com­pre­hen­sive and near-real-time pub­lic credit registry and com­pre­hen­sive credit de­vel­op­ment re­ports by the credit in­for­ma­tion com­pa­nies will help banks in credit assess­ment and risk pric­ing and make the credit mar­ket more ef­fi­cient,” said ICICI Bank CEO Chanda Kochhar.

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