Reserve Bank policy panel likely to hold the rates

Central bank may come out with steps to strengthen the joint lenders’ forum

REVIEW ON APRIL 6

THE SIX-MEMBER Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to keep the repo rate unchanged in the upcoming policy review on April 6 given the shift in focus to bringing the retail inflation to 4 per cent amid liquidity surplus in the banking system. However, bankers are expecting a quasi-government asset management company to address bank asset quality during the policy review — fourth by Urjit Patel as the RBI Governor — or soon afterwards.

The RBI is also likely to come out with steps to strengthen the joint lenders’ forum (JLF) and oversight committee (OC) mechanisms in order to resolve stressed assets of around Rs 14 lakh crore. However, it’s unlikely to change the March 2017 deadline to clean up the balance sheets of banks with higher provisions, as indicated by RBI Deputy Governor SS Mundra earlier this month.

Bankers and rating agencies expect the retail inflation to rise to 4.5 per cent in March 2017, as the favourable base continues to fade, while undershooting the RBI’S projection of 5 per cent for Q4 FY2017 by a wide margin. However, with greater emphasis on bringing inflation in a durable manner to 4 per cent -the mid-point of the consumer inflation band of 2-6 per cent -the MPC is expected to maintain status quo on the repo rate in the April 2017 policy review. The RBI last cut the Repo rate by 25 basis points to 6.25 per cent in October 2016 policy.

Naresh Takkar, Managing Director and Group CEO, ICRA, said: “although the CPI inflation is likely to significantly undershoot the March 2017 target, we do not expect a repo rate cut in the upcoming policy review in April 2017, with the MPC firmly focused on the medium term target of 4 per cent.”

In contrast to the stated stance of maintaining systemic liquidity closer to neutral, the gradual pace of remonetisation after the note ban has led to prolonged liquidity surpluses. “Nevertheless, the central bank is unlikely to increase the CRR to absorb the surplus liquidity, as that would discourage banks from reducing their MCLR, delaying the transmission of past monetary easing. Open market sales of the RBI’S holdings of government securities could be employed as a tool to manage liquidity at this juncture,” Takkar said.

According to Care Ratings, interest rates will be guided largely by the RBI call on the repo rate which we think will be neutral once again with no change expected in the April policy given the tenuous nature of expected food inflation.

“We expect the RBI’S MPC to hold rates on April 6, as it shifted to a neutral from accommodative stance last time. Still, it will likely keep the door open for further easing with growth slowing, benign inflation and the need to attract FPI inflows by supporting growth. Core inflation has actually slipped to 4.2 per cent from 4.8 per cent in October,” said a Bank of America Merrill Lynch report. If El Nino does not hit, the RBI is likely to go for a 25 bps cut on August 2 after paying the special demonetization dividend of Rs 60,000 crore.

A significant revision in the MPC’S CPI inflation outlook for FY2018 is unlikely at this stage. However, growth forecasts for FY2017 and FY2018 may be revisited, from the February 2017 estimates of 6.9 per cent and 7.4 percent, respectively, ICRA said.

On the steps to strengthen the JLF and oversight committee mechanisms in order to resolve stressed assets, RBI Deputy Governor SS Mundra recently said, “I think the discussion is coming around whether we need to provide more strength to the processes and whether the institution of oversight committee can be further enlarged or strengthened and we are also looking at the JLF mechanism.”

The RBI has already indicated that the March 31 balance sheet cleanup deadline will remain unchanged. “It holds very much” and there is no question of banks failing to meet it since since it was being monitored every quarter, Mundra had said.

He said that during meetings with the Finance Ministry, on one occasion 20 top non-performing assets (NPAS) were discussed, while another time 50 top NPAS were discussed. “These are initial phases of discussion... once we reach a definitive stage in that, then all the other things will come including the timeline,” he explained and added that even in the recent past there has been an active engagement between the RBI, the government and all the other stakeholders on stressed assets.

With only around 80 per cent of the demonetised currency likely to be replaced by endmarch 2017, the surplus in systemic liquidity is expected to continue. At present, excess liquidity of over Rs 4 lakh crore is entirely being absorbed under the Liquidity Adjustment facility, with the stock of Cash Management Bills issued under the Market Stabilisation Scheme during December 2016-January 2017, having matured by now, analysts said.