RBI holds rates, cuts inflation forecast PATEL DRAWS Taking a loan? Rates VEIL OVER RIFT to now be linked to WITH GOVT external benchmark

POLICY GUIDANCE RBI’S MPC decides to retain calibrated tightening stance

MUMBAI: The Reserve Bank of India (RBI) kept its policy rates unchanged on Wednesday, as was widely expected, and cut its inflation forecast for the rest of the financial year, citing a sharp fall in crude oil prices and food “deflation”.

The central bank also introduced proposals to improve policy rate transmission and credit discipline, besides initiating a predictable liquidity injection over the next six quarters, starting January, through a phased reduction of 25 basis points (bps) every quarter in statutory liquidity ratio (SLR). The six-member Monetary Policy Committee (MPC) voted unanimously to keep the policy rate unchanged at 6.5%. Barring Ravindra Dholakia, the MPC voted in favour of maintaining the earlier stance of “calibrated tightening”. Dholakia, who is known for his dovish stance, voted to change the stance to neutral.

The MPC slashed its inflation projection to 2.7-3.2% from 3.9-4.5% for the second half of the current financial year. It expects inflation to quicken to 3.8-4.2% in the first half of the following year.

“Given the assessment that growth will remain healthy for the rest of the year, the MPC retained its stance at calibrated tightening so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals. If upside risks do not materialize or are muted in their impact as reflected in incoming data, there is a possibility of space opening up for com- mensurate policy actions by the MPC,” RBI governor Urijit Patel said.

The bond markets, which interpreted this as a possibility of a future rate cut, saw the 10-year bond yield fall over 13 basis points during trade. The 10-year government bond yield closed at 7.441%, a level last seen on April 13, from its previous close of 7.573%.

While the MPC reduced the inflation forecast, it retained the gross domestic product estimate for FY19 at 7.4% with “risks somewhat to the downside”, possibly to account for the credit squeeze and demand weakness.

RBI’S new liquidity management framework incorporates an SLR reduction by 25 bps every quarter until the SLR reaches 18% of net demand and time liabilities (NDTL). While this reduction is unlikely to have a material impact on domestic liquidity, it is part of the roadmap to align SLR with 100% Liquidity Coverage Ratio (LCR). LCR is the amount of high-quality liquid assets that banks have to set aside to meet short-term obligation.

“The RBI decision to keep rates on hold was more in consonance with market expectations but the policy guidance was a pleasant and pragmatic surprise. The significant downward revision in inflation projections and assurance of continued durable liquidity was most reassuring to market participants in terms of a stable and predictable interest rate structure,” said Rajnish Kumar, chairman, State Bank of India. Governor Patel also ruled out any possibility of a cut in cash reserve ratio (CRR) to enhance liquidity. RBI keeps the key repo rate unchanged at 6.5%, retaining its 'calibrated tightening' policy stance

The six-member monetary policy committee (MPC) votes unanimously in favour of a pause on rate action

MPC member Ravindra Dholakia votes to change the stance to neutral

The committee sharply lowers its inflation projection to 2.7-3.2% from 3.9-4.5% for the second half of this financial year

The MPC retains the gross domestic product (GDP) growth estimate for the current year at 7.4% MUMBAI: The Reserve Bank of India (RBI) chief on Wednesday drew a veil over a public spat with the government, refusing to answer questions on a matter which had raised concerns that the central bank’s independence could be undermined.

RBI governor Urjit Patel made clear he would not be drawn on a controversy that first blew up in October.

“I already said I would avoid those questions because we’re here discussing the monetary policy committee resolution,” he told reporters at a press conference.

Patel’s reluctance to broach the subject was fairly typical for a central banker regarded as naturally reticent. Making his first media appearance since the row erupted, Patel brushed off questions from two reporters. “Is this related to the monetary policy committee (MPC) resolution? I don’t think so. We’re here to discuss the monetary policy committee resolution and the macroeconomy,” Patel responded the second time he was pressed to comment.

The disagreements with Modi’s government do not involve monetary policy. Indeed, three of the six members of the MPC, chaired by Patel, are government nominees, and the decision to keep interest rates where they are was unanimous. MUMBAI: In a bid to bring transparency into loan pricing, the Reserve Bank of India (RBI) on Wednesday said all banks will have to link floating rate loans to external benchmark rate and do away with marginal cost of funds based lending rate (MCLR).

From April 1, 2016, all new floating rates for home loans, personal loans and auto loans will be benchmarked to repo rate, 91-day treasury bills yield produced by the Financial Benchmarks India Pvt. Ltd (FBIL), 182-day treasury bill yield produced by the FBIL or any other benchmark market interest rate produced by the FBIL. According to the central bank, the spread over the benchmark rate—to be decided wholly at banks’ discretion at the inception of the loan—should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change.

“So far banks used internal benchmark to calculate and set home loan rates. Now RBI is asking banks to pick external benchmark rate plus a spread as the rate for borrowers. So if the external benchmark rate is 6% and the spread is set at 250 basis points (bps), the home loan rate will be 8.5%. If the external benchmark rate changes to 5%, then your home loan rate will change to 7.5%. The spread can’t change for the lifetime of the loan. But if the credit profile of the customer improves, the bank can reduce the spread from say 250 bps to 225 bps,” said Rajiv Anand, executive director at Axis Bank Ltd.

The RBI has also asked banks to adopt a uniform external benchmark within a loan category. “Banks will have to decide on which external benchmark rate it wants to link loans as there are multiple options available. We will study the various options available,” said Anand. Simply put, the adoption of multiple benchmarks by the same bank is not allowed within a loan category. RBI will issue final guidelines by the end of December 2018.

In the past, RBI has pointed out that the banks are not passing the benefits of lower interest rates to consumers and in the last 7 years, floating rate home loans have switched from benchmark prime lending rate (BPLR) to base rate in 2010 and then to marginal MCLR in 2016. The latest move is to ensure that the banks don’t withhold the benefit.

However, it will make loan rates more volatile. “As banks use external benchmark, there is going to be greater level of transparency but you will also see volatility in the home loan rates. It also means customers will have to bring in more discipline in managing their cash flow for paying EMIS,” said Anand.