Reaffirming an accommodative stance, the Reserve Bank of India (RBI) on Tuesday kept its policy rates unchanged in line with the experts expectation, while Governor Raghuram Rajan nudged banks to pass on the benefits of earlier cuts to borrowers. Hoping inflation is likely to perform better than expected by March 2016, Rajan said there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 per cent reduction announced so far during 2015.
Announcing its fifth bi-monthly monetary policy review of this fiscal, the RBI Governor also said the economy is truly in a ‘recovery mode’ and kept the repo and the CRR unchanged at 6.75 and 4 per cent, respectively, while the market was expecting a status quo in view of the rise in retail inflation and a likelihood of capital outflows on a possible US Fed rate hike later this month.
The RBI also said it would shortly announce methodology for determining the base rate taking into account the marginal cost of funds, a move aimed at ensuring that banks pass on policy rate cuts to borrowers. “In the meantime, since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 bps,” RBI said in its fifth bi-monthly monetary policy statement.
On the status quo stance adopted on Tuesday, after front-loading with a 50 bps surprise repo cut in the last policy review, Rajan explained that our sense, which is why we cut interest rates last time, was that the balance of risks -- how much we are wanting to do for energising growth versus how much we have to be worried about inflation -- allowed us to reach the policy stance that we did last time which we have maintained this time.
In fact, retail inflation rose to 5 per cent in October on costlier food items such as pulses, matching RBI’s target for March 2017. As per the RBI’s projection, the central bank had set a target of getting inflation down at 6 per cent by January, and was aiming to reduce the number further to 5 per cent by March 2017. “Keeping the present scenario of the economy, the RBI will monitor developments on the commodity prices, including food and oil and external developments in its future policy formulations,” Rajan said.
“Uptick in CPI inflation excluding food and fuel for two months in succession warrants vigilance,” Rajan said, as he hinted at easing rates as and when room is available. Stating that inflation is expected to accelerate till December before plateauing, Rajan said it may follow RBI’s projected path with risks slightly to the downside.
The RBI, he said, will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017.
The RBI Governor said banks have been given more powers and flexibility to deal with bad loans, which have crossed 6 per cent as of the June quarter. The gross NPA of the public sector banks rose to 6.03 per cent as of June 2015 from 5.20 per cent in March 2015. “The second quarter GDP growth indicates early signs of recovery but the central bank will stick to its earlier projection of 7.4 per cent economic growth for the current fiscal with a marginal downward bias,” said the RBI Governor.
Rajan also expressed anguish at the banks’ reluctance to pass on the benefits of the earlier rate cut actions to the borrowers, saying the median decrease in the base rates over the course of the year has only been 0.60 per cent as against the RBI’s 1.25 per cent cut in the repo rate since January. “I will make them do so by introducing the marginal cost as the basis for calculating the base rate the norms for which will be issued later this week,” said Rajan, adding that since rate reduction cycle that began in January, less than half of the cumulative policy repo rate cut of 125 bps has been transmitted by banks and the median base lending rate has declined only by 60 bps since then.
Stating that the marginal cost of pricing makes the costs flow through into lending rates faster, Rajan said, “The intent is that banks would be able to make incremental loans on the marginal cost pricing while historical or legacy loans will be on the base rate. That’s the intent as we go forward.”
On the economy which showed signs of recovery in the July-September quarter at 7.4 per cent, led by a solid 9.3 per cent growth in manufacturing, Rajan said, “What we have is an economy which is well and truly in recovery, but with areas of weakness. Hopefully, as we go forward, some of the areas of weakness will turn around.”
The Government had on Monday said the GDP clipped at 7.4 per cent in the September quarter, or 7.2 per cent in the first half. The government has projected 7.6 to 7.8 per cent growth this fiscal while the RBI has pegged it down at 7.4 per cent today with a negative bias.
However, Rajan, whose anti-inflation stance had earned him flak from pro-growth advocates, also declined to take credit for the economic growth though it has been nearly a year since the central bank shifted its hawkish stance, saying a variety of factors, including a ‘feel good’ environment created by the Government and the surge in public investments, have helped the economy turnaround. “What causes growthIJ It’s a mix of factors. I would be far from claiming credit for the monetary policy,” he said.