With lack of clarity on macro front post demonetisation, rising inflationary threat and shifting its monetary stance from ‘accommodative’ to ‘neutral, Reserve Bank of India (RBI), on Wednesday, kept the key rates on hold, expecting that there still scope for cutting lending rates by banks to provide cheaper loans for the citizens of the country.
“The MPC exercised abundant prudence in keeping the policy rates on hold while looking at these transient effects and awaited a clearer and unbiased assessment of inflation,” RBI Governor Urjit Patel said at his post- Monetary Policy Review press meet in Mimbai.
With this move, the RBI will now keep its eyes on the inflation target of 4 per cent and the banks will have to take on the onus of quickly clearing off bad loans, hastening recapitalisation and syncing of rates on small savings through requisite transmission.
Patel-headed six-member Monetary Policy Committee (MPC) unanimously decided to maintain status quo on repo rate for the second time in a row, leaving it untouched at six year-low of 6.25 per cent, so as to ‘assess’ how the transitory effects of demonetisation on inflation and the output gap play out.
“The broad-based MPC decided to change the stance from ‘accommodative’ to ‘neutral’ while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” Patel said.
Besides, the RBI lowered economic growth forecast to 6.9 per cent for the current fiscal from 7.1 per cent estimated earlier, but said the economy will bounce back to 7.4 per cent next fiscal. The central bank also lowered its current fiscal GDP growth forecast to 6.9 per cent, while expecting a rebound to 7.4 per cent in the next year. In the last bi-monthly policy also, RBI had slashed its growth forecast from 7.6 per cent to 7.1 per cent.
As far as inflation is concerned, the central bank listed the threats, including rising oil and metal prices and the ‘stubborn’ core inflation at nearly 5 per cent, which make it pertinent to have the flexibility of acting in either directions, while shifting from its two-year accommodative policy stance to a ‘neutral’ one that virtually dashes hopes of further cuts in immediate future. During these two years, as inflation continued its downward journey, the RBI cut its key rates by 1.75 per cent. Patel, however, was quick to note that there is more room for banks to lower their lending rates saying the weighted average lending rate has come down by only up to 0.90 per cent, while RBI has delivered 175 bps cut since January 2015.
“There is still scope for the lending rates to come down because our policy rates came down by 175 basis points and weighted average lending rates have come down only by 85-90 basis points. I think that there is scope for more transmission,” Patel said.
Economic Affairs Secretary Shaktikanta Das also hoped that banks will step up their lending with focus on SMEs, housing and individual loans. Disappointed with the RBI’s decision to leave key policy rates unchanged, industry leaders, however, said a rate cut was needed to revive demand hit by the cash crunch post demonetisation. They also expressed concern over the apex bank shifting the stance of the monetary policy.
Post-demonetisation, banks had sharply reduced their lending rates based on marginal cost of funds based lending rate (MClR). In fact, the MClR was born in April last year after repeated call by the former Governor Raghuram Rajan went unheeded by bankers to lower rates even after the RBI had done so by 125 bps.
On bad loan front, RBI Deputy Governor SS Mundra said that the RBI guidelines on providing adequate provisioning to cover bad loans or non-performing assets (NPAs) would continue to put pressure on banks’ profitability for some time, even though some banks are witnessing reduction in proportion of NPAs. “Overall, the banking system has shown an improvement in operating profit. But on the back of our provisioning, I think some of the pressure on net profit would continue,” Mundra said.
Explaining the rationale for a status quo on the policy front, Patel made it clear that the central bank is committed to achieve its medium-term inflation objective of 4 per cent without giving up on boosting the growth drivers.
On coming data prints pointing to a cool down in headline inflation at 3.4 per cent for December and meeting the 5 per cent level for March 2017, along with the impact to growth post note-ban, had led many analysts to expect a rate cut at the review.
The Governor further said data inflow has been clouded post-demonetisation, leading to difficulties in having a clear assessment of the macroeconomic situation after the November 8 note ban. On the shift of the policy stance from accommodative to neutral, newly-inducted deputy governor in-charge of monetary policy committee Viral Acharya said there is a fear of hardening of oil and base metal prices globally, which makes the RBI shift its policy stance.
The RBI also cut its growth estimates to 6.9 per cent under the gross value added (GVA) basis in the current financial year, and said it will strengthen to 7.4 per cent in the next financial year.
Having shifted to the neutral policy stance, the RBI lobbed the ball into the Government court for a further reduction in lending rates for borrowers, asking it to work on resolving NPA issues, recapitalisation and scaling down small savings rates which compete with bank deposit rates. Reacting to the policy, State Bank chairman Arundhati Bhattacharya said, “It came on expected lines given the domestic and global uncertainties, and concurred with the RBI view on doing more for NPA resolution, re-capitalisation and market driven small savings. The shift in stance to neutral may be a little early.”