RBI maintains status quo, cautions against inflation
Mumbai : Reserve Bank Governor Raghuram Rajan today left borrowing costs unchanged but signalled a prospect of interest rate cut later this year if strong monsoon rains dampen inflation.
He also emphasised that the need for more monetary transmission – passing on the rate cut benefits to borrowers – to support growth revival continues to be critical.
In his penultimate bi-monthly monetary policy before his three year term comes to an end on September 3, Rajan said the recent stronger-than-expected inflationary pressures from food and commodity prices brought “considerable uncertainty”.
But strong monsoon rainfall and astute food management to increase supplies could offset those risks, he said.
“Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative,” he said, adding that RBI will monitor macroeconomic and financial developments for any further scope for policy actions.
Accordingly, Rajan retained the short-term lending rate at 6.5 and the cash reserve requirement of banks at 4 per cent.
Commenting on policy, Economic Affairs Secretary Shaktikanta Das said the policy unveiled is broadly in line with government’s expectations on growth and inflation.
RBI pegged economic growth at 7.6 per cent and retail inflation target at 5 per cent for January 2017.
Explaining the rationale for keeping the rates unchanged, Rajan said: “Incoming data since the April policy announcement show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices.”
Retail inflation soared to 5.39 per cent in April on higher food prices, reversing a downward trend seen in recent months.
Besides rising inflation, the crude oil price is also looking up and has touched USD 50 a barrel, from a low of about USD 30, and could increase inflationary pressures.
Rajan said there are upside risks to the price index trajectory such as firming international commodity prices, particularly crude oil and the 7th pay commission awards which will have to be factored into projections as soon as clarity on implementation emerges.
Rajan, who maintained the policy status quo as widely expected, also noted that domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the pay commission award.
There are firm signs of recovery, which though is still uneven, he said.
RBI said higher public sector capital expenditure, led by roads and railways, should crowd in subdued private investment due to financial stress.
“Yet, business confidence will be restrained to an extent on account of unrelenting global factors. On a reassessment of balance of risks, the GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced,” Rajan said in the policy statement.
Today’s review could turn out be the last policy anchored by Rajan if the proposed Monetary Policy Committee (MPC) is put in place before the next review due on August 9.
On further monetary policy transmission, he said, it will support the revival of growth that continues to be critical.
“The government’s reform measures on small savings rates combined with the Reserve Bank’s refinements in the liquidity management framework should help the transmission of past policy rate reductions into lending rates of banks. The RBI will shortly review the implementation of the Marginal Cost Lending Rate framework by banks,” he said.
Timely capital infusions into constrained public sector banks will also aid credit flow, he added.
The Budget has made Rs 25,000 crore provision for recapitalisation of the PSU banks for the current fiscal.
Commenting on the status quo policy, Yes Bank Managing Director Rana Kapoor said “I foresee RBI’s cautious stance giving way to accommodative actions in August, on the back of favorable monsoon outcomes and acceleration of reforms.”
On the liquidity front, which has been concern for the banks and industry for quite some time, Rajan said RBI will continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from 1 per cent of NDTL to a position closer to neutrality.
Consequently, the reverse repo rate under the LAF will remain unchanged at 6 per cent, and the marginal standing facility rate and the bank rate at 7 per cent.