RBI KEEPS REPO RATES SAME, EASES HOME LOAN PROVISION
This signals central bank’s accommodative stance: Economists
MUMBAI: The Reserve Bank of India’s (RBI) Monetary Policy Committee on Wednesday kept key interest rates unchanged but softened its hawkish stance owing to the fall in retail inflation to a record low and lower-thanexpected economic growth.
While the repo rate—at which the central bank infuses liquidity in the banking system—has been kept unchanged at 6.25%, the RBI lowered its inflation forecast for the current fiscal. The MPC has projected headline inflation at 2-3.5% in the first half of the year and 3.5-4.5% in the second half. Economists see this as an indication that the central bank may be accommodative on the future course of rates in a bid to revive economic growth.
The decision was not unanimous. One external member of the panel, Ravindra Dholakia, a professor at Indian Institute of Management, Ahmedabad, dissented.
The RBI did cut the statutory liquidity ratio -- the portion of bank deposits that have to be invested in government bonds -by 50 basis points to 20%.
In February, the RBI shifted its monetary policy stance to neutral from accommodative, thereby ending the easy policy stand that it adopted since January 2015.
The Reserve Bank of India’s (RBI) Monetary Policy Committee on Wednesday kept key interest rates unchanged but softened its hawkish stance owing to the fall in retail inflation to a record low and lower-thanexpected economic growth.
While the repo rate—at which the central bank infuses liquidity in the banking system—has been kept unchanged at 6.25%, the RBI lowered its inflation forecast for the current fiscal. The MPC has projected headline inflation at 2-3.5% in the first half of the year and 3.5-4.5% in the second half. Economists see this as an indication that the central bank may be accommodative on the future course of rates in a bid to revive economic growth.
The decision was not unanimous. One external member of the panel, Ravindra Dholakia, a professor at Indian Institute of Management, Ahmedabad, dissented.
The RBI did cut the statutory liquidity ratio -- the portion of bank deposits that have to be invested in government bonds -by 50 basis points to 20%.
In February, the RBI shifted its monetary policy stance to neutral from accommodative, thereby ending the easy policy stand that it adopted since January 2015. During the same period, the RBI had reduced repo rate by 175 basis points. A basis point is one-hundredth of a percentage point.
Retail inflation as measured by the Consumer Price Index dropped to a new record low of 2.99% in April from a nearly fivemonth high of 3.89% in March on a lower base effect and lower food prices. Growth in the fourth quarter of the fiscal slowed to 6.1%, mirroring the impact of demonetisation.
“At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award are upside risks. The date of implementation of the latter has not been announced and as such, has not been factored into the baseline projections. The implementation of the Goods and Services Tax is not expected to have a material impact on overall inflation,” the policy statement said.
The RBI said that they are cautious on the outlook for inflation and they will wait for more data to see whether the April inflation reading will sustain or not.
Viral Acharya, RBI deputy governor, said that if the future data warrants, then RBI may act for a broader accommodation through the interest rate policy.
Most economists said that while the RBI is cautious on inflation, this policy has set a stage for the RBI to move its stance to accommodative or even cuts rates in the later part of the year.
“Based on the current inflation trajectory and depending on how the monsoon pans out and when the HRA (house rent allowance) implementation happens, it may open up a room for possible rate cut. Though, I am not entirely convinced that they will cut in August. I think they will first shift stance from neutral to possibly accommodative and then look at a rate cut,” said Gaurav Kapur, chief economist, IndusInd Bank.
Rupa Rege Nitsure, group chief economist at L&T Financial Services said that growth concerns are expected to outweigh inflationary risks for a sizeable period during FY18 and this may prompt the RBI to change its stance to accommodative in the coming months.
The RBI has also revised its target for gross value added, another measure for economic growth, by 10 basis points to 7.3%.
“Remonetisation should enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy. Furthermore, the reductions in banks’ lending rates post-demonetisation should support both consumption and investment demand of households and stress-free corporates,” the MPC statement said.