RBI holds repo rate on in­fla­tion con­cerns

MPC sees fis­cal slip­page, global fi­nan­cial in­sta­bil­ity height­en­ing as­set price volatil­ity

The Hindu Business Line - - FRONT PAGE -

As was widely ex­pected, the sixmem­ber mon­e­tary pol­icy com­mit­tee (MPC) on Wed­nes­day voted 5:1 in favour of a sta­tus quo on the pol­icy repo rate, cit­ing var­i­ous rea­sons, in­clud­ing the pos­si­bil­ity of re­tail in­fla­tion edg­ing up, risk of fis­cal slip­page, and oil prices go­ing up.

The cen­tral bank nudged up its in­fla­tion pro­jec­tion to the 4.3-4.7 per cent range for the third and fourth quar­ters of FY18 against 4.24.6 per cent pro­jected in the Oc­to­ber bi-monthly pol­icy. It, how­ever, re­tained the gross value added (GVA) pro­jec­tion at 6.7 per cent.

Of the five bi-monthly mon­e­tary poli­cies an­nounced in this fi­nan­cial year so far, the RBI pared the repo rate — the in­ter­est rate at which banks bor­row funds from the cen­tral bank to over­come short­term liq­uid­ity mis­matches — only once, from 6.25 per cent to 6 per cent in the Au­gust 2017 re­view.

The MPC also de­cided to per­se­vere with the neu­tral stance and re­it­er­ated its com­mit­ment to keep­ing con­sumer price in­dex (CPI) in­fla­tion at a tar­get of 4 per cent while sup­port­ing growth.

Fi­nan­cial mar­ket play­ers, how­ever, seemed dis­ap­pointed with the RBI’s de­ci­sion. The eq­uity mar­ket bell­wether — the BSE Sen­sex — fell 205.26 points to 32,597.18 and the ru­pee weak­ened 13 paise to close at 64.5150 to the dol­lar.

“In ar­riv­ing at this de­ci­sion, the MPC took note of the up­side pres­sures from food and fuel prices on evolv­ing cost of liv­ing con­di­tions and in­fla­tion ex­pec­ta­tions,” said RBI Gover­nor Ur­jit Pa­tel. “Our sur­veys in­di­cate that cor­po­rates are also con­tend­ing with ris­ing in­put cost con­di­tions and higher risks of pass through to re­tail prices in the near term.”

Pa­tel fur­ther said: “In ad­di­tion, the com­mit­tee ex­pressed con­cern about the im­pli­ca­tions for the in­fla­tion out­look of (a) pos­si­ble fis­cal slip­page and (b) global fi­nan­cial in­sta­bil­ity height­en­ing as­set price volatil­ity.”

How­ever, the MPC also said it ex­pected the usual sea­sonal mod­er­a­tion in the prices of vegetables and fruits and the low­er­ing of tax rates by the GST Coun­cil to mit­i­gate some of these pres­sures.

With the RBI keep­ing the repo rate un­changed at 6 per cent, banks are un­likely to tweak ei­ther their de­posit or lend­ing rates. The MPC pitched for re­duc­ing the cost of do­mes­tic bor­row­ings through im­proved trans­mis­sion by banks of past mon­e­tary pol­icy changes on out­stand­ing loans.

On the neu­tral mon­e­tary pol­icy stance, Pa­tel said this means that data flow in the com­ing months and quar­ters will de­ter­mine what the RBI does re­gard­ing the pol­icy.

“The neu­tral stance is there for the rea­son that all pos­si­bil­i­ties are on the table and we will look care­fully at both the in­fla­tion and growth data that comes in the com­ing months...,” Pa­tel said.

“...We did not con­sider shift­ing the stance be­cause noth­ing be­tween Oc­to­ber to now was sig­nif­i­cant enough in terms of the macro out­comes to war­rant that,” he ex­plained.

Credit growth

Pa­tel noted that the lat­est data on bank credit sug­gest that “we are al­ready on the up­take in terms of credit growth.” Credit is “al­ready flow­ing, more than what was the case in Oc­to­ber. And as the econ­omy picks up, the de­mand for credit should go up,” he added.

In its state­ment on devel­op­ment and reg­u­la­tory poli­cies, the RBI an­nounced ra­tio­nal­i­sa­tion of the mer­chant dis­count rate to give a fur­ther fil­lip to the ac­cep­tance of debit card pay­ments across a wider net­work of mer­chants.

Fur­ther, the RBI per­mit­ted the over­seas branches/sub­sidiaries of Indian banks to re­fi­nance ex­ter­nal com­mer­cial bor­row­ings (ECBs) of top-rated cor­po­rates as well as ‘Navaratna’ and ‘Ma­haratna’ pub­lic sec­tor un­der­tak­ings by rais­ing fresh ECBs.

Jatin­der­bir Singh, Chair­man, Indian Banks’ As­so­ci­a­tion, said: “The pol­icy is on the ex­pected lines. Clearly, the in­fla­tion dy­nam­ics dom­i­nated the RBI’s de­ci­sion to main­tain the sta­tus quo. RBI’s re­ten­tion of the GVA pro­jec­tion for the fi­nan­cial year and main­te­nance of its neu­tral stance, cou­pled with the im­mi­nent re­cap­i­tal­i­sa­tion pro­gramme for pub­lic sec­tor banks, will fur­ther help in im­prov­ing the over­all credit growth.”

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