Citing risks to inflation due to spurt in farm-loan waivers by States recently and disbursement of allowances under the 7th Central Pay panel’s award to the Government employees, the Reserve Bank of India (RBI) for the fourth straight time kept the repo rate unchanged at 6.25 per cent on Wednesday, while the reverse repo, at which RBI borrows, will be 6 per cent. Besides, the central bank also lowered economic growth projection to 7.3 per cent for the current fiscal from 7.4 per cent earlier.
However, there is some cheer for home buyers as interest on loans of between Rs30 lakh and Rs75 lakh are expected to be cheaper as RBI reduced risk weightage for this category.
RBI Governor Urjit Patel-led Monetary Policy Committee or MPC, in a slightly less hawkish policy statement, said it was not cutting interest rates as it wanted to be moresure that inflation will stay subdued.
While leaving for the key rates unchanged, RBI made it easier for banks to lend more by cutting the Statutory liquidity Ratio (SlR) by 50 basis points to 20 per cent of total deposits from June 24. The SlR is the percentage of deposits banks must park in the Government securities.
The Government has been pressing for a cut in interest rates to increase private investment and had sought a meeting with the members of MPC, but RBI Governor Urjit Patel said that all of them declined to meet. Senior officials of the Finance Ministry were scheduled to meet MPC members on June 1 and 2 but all six members decided against the meeting. But the Finance Ministry was not happy with the decision of the six-month-old MPC, with Chief Economic Adviser Arvind Subramanian openly expressing frustration at interest rate not being cut to help an economy that witnessed slowest growth in two years and credit growth being at its lowest in 25 years. “Seldom have economic conditions warranted a substantial monetary easing as they are now. Not just headline inflation has been running well below the target so far, but even core inflation has also declined sharply. In this view, inflation forecast errors have been large and systematically one-sided in overstating inflation," Subramanian said, adding that lowering growth and low inflation amid appreciating real exchange rate makes monetary policy conditions even tighter.
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.
As far as the RBI’s decision is concerned, five members were in favour of the maintaining the status quo for key rates, while Ravindra H Dholakia was not. The central bank has cut by 0.5 per cent to 20 per cent, a move aimed at raising buoyancy in the loans market as banks would have slightly higher funds for lending. “The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," RBI said in its second bi-monthly monetary policy review for 2017-18.
With the RBI's move, markets shrugged off and BSE benchmark Sensex slipped into negative territory for a brief period after the RBI kept the key rates unchanged on Wednesday, but regained slightly towards the fag-end of the session, closing with a gain of 80.72 points at 31,271.28.
“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,” it said.
On the GDP front, the central bank lowered economic growth projection to 7.3 per cent for the current fiscal from 7.4 per cent earlier. However analysts and economists were expecting the MPC to go in for a status quo on the rates, but soften its commentary from the hawkish one, given clarity on various aspects and the cool- down in inflation.
The headline inflation has come down to 3 per cent for in April 2017, while demonetisation continues to impact GDP growth which dipped to 6.1 per cent in the last quarter of the last fiscal. There is also greater clarity on the rainfall, with the IMD predicting for normal monsoons this season which can help the food inflation situation.
Moreover, RBI said, the implementation of the Goods and Services Tax (GST) is not expected to have a material impact on overall inflation. The Government intends to roll out GST from July 1. The RBI shifted its policy stance to ‘neutral’ in early 2017, allowing it the flexibility to move in either direction, from ‘accommodative’ stance for two years.
It followed that up with statements at the last policy review about worries of inflation rising to 5 per cent in the second half of fiscal 2017-18 and also the need to get the price-rise number to its target of 4 per cent in a credible way.
On bad loan, the RBI also said it has devised a strategy to deal with large stressed accounts and expects to see some action soon. “Overall, the RBI has a strategy to deal with the resolution of large assets and we are working in a calibrated manner and we hope to see some actions coming soon,” Deputy Governor NS Vishwanathan said.
Favouring the note ban, Governor Urjit Patel also said demonetisation has not led to lower economic growth, while citing ‘surprises’ like dip in inflation as well as GDP growth for maintaining status quo on policy rates. “Data shows that the slowdown in economic activity set in during Q1, FY17, well ahead of demonetisation,” Patel said, reacting to the dip in growth in the revised growth figures released by CSO.
However, Deputy Governor Viral Acharya said it was lack of clarity in the narrative, where there have been 'surprises' in dip in inflation to 3 per cent in April and the revision in growth to 6.1 per cent by CSO. “We have a combination of a big surprise in the inflation number as well as the CSO revisions. We are just trying to get a finer grip on what is exactly happening in the economy over the next few months,” he said.
However, bankers also welcomed the move, saying there is a room likely for rate cuts in the latter half of the year. “The large cut in inflation projection by the RBI in the monetary policy is in consonance with ground realities and is likely to create room for rate cuts in the latter half of the year. The decision to reduce the risk weights for home loans will release capital for the banking industry and is a positive move," said Arundhati Bhattacharya, Chairman, SBI.
On the other hand, Chanda Kochhar, MD and CEO, ICICI Bank said, “It is also heartening that the RBI has again reiterated its focus on resolution of stressed assets which will help to strengthen the banking system and ensure that investments made are optimally utilised. The SlR cut and reduction in risk weights for housing loans are positive moves that will support bank liquidity and encourage growth in housing loans.”