The outgoing Reserve Bank of India (RBI) Governor, Raghuram Rajan, who holds powers setting rates in the central bank, on Tuesday, bade an emotional farewell to the rate cut decision - an USP of the central bank policy which has been generally followed by the banking fraternity in the country for years. Rajan, however, maintained the country’s growth projection at 7.6 per cent for the current fiscal, but hinted upside risk to his March 2017 inflation target of 5 per cent due to combination of factors. Taking the final call on rate cut, Rajan said, “Now the rate cut decision is upto the monetary policy committee (MPC) in which the interest rate setting powers would move from RBI Governor to the panel and a broadbased multi-member panel will decide on the interest rate at the next review on October 4.”
Rajan, who will demit office after completing his 3-year term on September 4, played key role for India where he performed during his tenure on four key metrics - inflation, current account deficit (CAD), foreign exchange rate and the stock market. looking forward to the same growth pace in next policy reviews, he said that half of the six-member monetary policy committee (MPC) - three members each from RBI and outside RBI - are already in place and the Government will name its nominees shortly. With the setting of MPC, the interest rate setting powers would move from RBI Governor to the panel. Terming his tenure as ‘fantastic’, Rajan said, “Snap judgements by critics do not matter as I have made useful contributions and the results will be visible in the next 5-6 years.”
In the customary RBI Monetary Review Policy till Tuesday, the central bank kept key rates - repo and reverses repo rates - unchanged as inflation hit near 2-year high but said the central bank’s stance remains accommodative. With upside risk to his March inflation target of 5 per cent which climbed to a 22-month high of 5.8 per cent in June, will continue to be on upside on factors like food inflation, services and the effect of the seventh pay panel implementation to the Government employees. So, Rajan kept the benchmark repurchase (repo) rate at 5-year low of 6.50 per cent and the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent as well. The reverse repo rate under the lAF remained unchanged at 6.0 per cent, MSF rate and the Bank Rate at 7.0 per cent.
“It is appropriate for the RBI to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. As you will note from the policy statement, we have kept rates on hold, maintaining an accommodative stance while we await developments. We are within the inflation band given to us by the Government and expect to be around 5 per cent CPI inflation by March 2017, absent unforeseen eventualities,” Rajan said.
Unhappy over passing on rate-cut benefits to customers in the past, Rajan also lambasted banks and complained that banks have passed benefits only in a modest measure to borrowers. “A pick-up in credit demand, which would follow the economic recovery and competition for corporate loans after the ongoing balance sheet clean-up by the state-run lenders, will ensure softer lending rates,” he said.
On price front, Rajan said risks to the March 2017 target of 5 per cent for headline inflation, which climbed to a 22-month high of 5.8 per cent in June, continue to be on upside on factors like food inflation, services and the effect of the seventh pay panel implementation to the Government employees. The strong sowing and the positive progress of the monsoon augurs well for the food inflation, RBI said, adding that prices of pulses and cereals are rising. Besides, he exuded confidence that inflation target of 5 per cent for March 2017 will be met as also that there will be no market disruption on account of foreign deposit redemptions over $20 billion.
Keeping growth pace of the country intact, RBI maintained its projection at 7.6 per cent for the current fiscal on a gross value addition basis, saying that favourable monsoon, which is 3 per cent above the average, raises prospects of agricultural expansion as well as rural demand. Besides, higher consumption is expected because of the implementation of the 7th Pay panel for the Central Government employees. However, Rajan added, “The successive downgrades in the global growth projections by multilateral agencies and world trade sluggishness is pointing to a further slackening in the external demand going forward.”
Welcoming the passage of the Constitutional amendments for transition to the Goods and Services Tax (GST), which will augur well for the growing political consensus for economic reforms, the RBI also said that the timely implementation of GST which has to kick in by April next year would be challenging but the indirect tax reform would be strengthening the Government finances over the medium-term, boost business sentiment and eventually investments. “The current accommodative stance of monetary policy and comfortable liquidity conditions should also provide a congenial environment for the reinvigoration of aggregate demand conditions,” the RBI said.
On non-performing assets (NPAs) or bad loans that have been ailing the banking sector for a long time, Rajan said he was comfortable with the stressed assets recognition process undertaken by the banks in the process of cleaning up their balance sheets.