In a move to keep inflation under check, the Reserve Bank of India (RBI) on Thursday kept key lending rate unchanged and shifted its focus towards the health of banking sector in the long term. The six-member Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, kept the repurchase or repo rate -- at which it lends to banks -- unchanged at 6.25 per cent but increased reverse repo rate to 6 per cent from 5.75 per cent.
The central bank also forecast a robust 7.4 per cent growth in 2017-18, aided by waning effects of demonetisation, although inflation risks remain in the medium term. “Underlying inflation pressures persist, especially in prices of services, input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve,” the RBI said, flagging weak monsoon, expected rise in the Government employees’ allowances and Goods and Services Tax (GST) as the primary factors that could knock up prices in the short-term.
The RBI also projected inflation to average 4.5 per cent in first half of current fiscal and 5 per cent in the October-March period, above the 4 per cent midpoint of target range. Besides, the RBI also revised Marginal Standing Facility (MSF) downwards by 0.25 per cent to 6.5 per cent. The MSF is RBI’s overnight lending rate for banks against the Government securities.
Focussing on the health of banking sector, the RBI said even though there have been a few positives on the bad loans front the current level of dud loan resolution is untenable as there has been a deterioration in the non performing asset (NPA) situation, and promised new measures to tackle the pain. “The present level of NPA resolution is untenable,” RBI Governor Urjit Patel said, while addressing the media at the customary post-policy presser in Mumbai.
Meanwhile, the markets shrugged off with the RBI’s move and 30-share BSE Sensex stayed in the red zone throughout the session, while some rate-sensitive bank and auto stocks ended on a mixed note after it left the key policy rate unchanged.
The narrowing of gap between the repo and the reverse repo stabilise money markets by reducing volatility in short- term money market rates and encourages banks to park their funds with RBI. Reiterating its neutral stance, it said, “The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving.”
With the hiking reverse repo, now bank can invest in Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvITs), a move that will help revive the cash-starved infrastructure sector. Banks are allowed to invest in equity-linked mutual funds, venture capital funds (VCFs) and equities to the extent of 20 per cent of their Net Owned Fund (NOF). “It is proposed to allow banks to invest in REITs and InvITs within this umbrella limit. Detailed guidelines will be issued by May-end 2017,” it said.
Banks, it said, have scope to further lower borrowing costs as a more complete transmission of policy impulses remains, including for small savings/administered rates. It is in this context that greater clarity about liquidity management is being provided, even as surplus liquidity is being steadily drained out.
Opening a room for standing deposit facility or SDF, Patel said, “We are in continuous dialogue with the Government to institute an standing deposit facility (SDF), which is a response to the expert report and also draws from best global practices and recommendation of the expert committee.
“The liquidity management has become important now to contain inflation, which he sees faces more upside risks due to monsoon uncertainty and the impact of the Seventh Pay commission on housing allowances and the GST implementation,” he said, adding that the note-ban induced excess liquidity has been continuously coming down -- from Rs 7.95 trillion in January to Rs 4.8 trillion by March-end.
With regard to transmission of monetary policy rate by banks, Patel said, “The MPC took note of the reduction in bank lending rates. There is further scope for a more transmission including for small savings and administered rates.”
“In its (MPC) opinion along with rebalancing liquidity conditions the Reserve Bank should endeavour to put the resolution of banks’ stressed assets on a firm footing and create congenial conditions for the bank credit to revive and flow to productive sectors of the economy,” he added.
Days after the BJP Government in UP waived over Rs 36,000 crore in farm loan, RBI Governor Urjit Patel warned that such schemes undermine honest credit culture and impair incentives for borrowers to repay bank loans.
Observing that loan waiver schemes “engender moral hazard”, the Governor pitched for creating a consensus against loan waiver promises in the interest of healthy national balance sheet and public at large.
The comment assumes significance against the backdrop of UP Government’s decision on farm loans and its consequent fallout in terms of increasing demand from politicians for similar concessions in other parts of the country.
“I think it (loan waiver schemes) undermines an honest credit culture. It impacts credit discipline. It (impacts) incentives for future borrowers to repay. In another words, waivers engender moral hazard,” he said after announcing the first bi-monthly monetary policy for 2017-18.
Debt waivers also entail transfers from taxpayers to borrowers, he said.
“If on account of this overall government borrowing goes up, yields on government bonds also get impacted. Thereafter, it can also lead to crowding of the private borrowers as higher government borrowing can lead to increasing cost of borrowing for others,” he said.
RBI has cut repo by 1.75 per cent since January 2015. Commenting on the monetary policy for 2017-18, SBI Chairperson Arundhati Bhattacharya said the RBI policy to keep the repo rate on hold was on expected lines, even though reverse repo rate was hiked to 6 per cent. “Elsewhere, on the Developmental and Regulatory Policies front, the RBI has announced a number of measures notably, substitution of collateral under lAF, allowing banks to invest in REITS and financial literacy; all these will go a long way in improving the financial system,” she said.
Welcoming the status quo policy India Inc said the RBI has rightly not really gone over-board and resorted to much feared measures like hike in Cash Reserve while leaving the policy interest rates unchanged is on the expected lines.
“Though the RBI wants banks to work on the stressed assets, finer points and clear cut glide path is required to resolve the NPAs in a time bound manner,” Assocham said.