Reserve Bank of India Governor Raghuram Rajan on Tuesday maintained a on key rates but indicated about interest rate cut later this year if strong monsoon rains offset inflation impact.
He also emphasised that the need for more monetary transmission - passing on the rate cut benefits to borrowers - to support growth revival continues to be critical.
In his penultimate bi-monthly monetary policy before his three year term comes to an end on September 3, Rajan said the recent stronger-than-expected inflationary pressures from food and commodity prices brought “considerable uncertainty”.
But strong monsoon rainfall and astute food management to increase supplies could offset those risks, he said.
“Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative,” he said, adding that RBI will monitor macroeconomic and financial developments for any further scope for policy actions.
Accordingly, Rajan retained the short-term lending rate at 6.5 and the cash reserve requirement of banks at 4 per cent.
Commenting on policy, Economic Affairs Secretary Shaktikanta Das said the policy unveiled is broadly in line with Government’s expectations on growth and inflation.
RBI pegged economic growth at 7.6 per cent and retail inflation target at 5 per cent for January 2017.
Explaining the rationale for keeping the rates unchanged, Rajan said: “Incoming data since the April policy announcement show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices.”
Retail inflation soared to 5.39 per cent in April on higher food prices, reversing a downward trend seen in recent months.
Besides rising inflation, the crude oil price is also looking up and has touched $50 a barrel, from a low of about $30, and could increase inflationary pressures.
Rajan said there are upside risks to the price index trajectory such as firming international commodity prices, particularly crude oil and the 7th pay commission awards which will have to be factored into projections as soon as clarity on implementation emerges. Rajan, who maintained the policy status quo as widely expected, also noted that domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the pay commission award.
There are firm signs of recovery, which though is still uneven, he said.
RBI said higher public sector capital expenditure, led by roads and railways, should crowd in subdued private investment due to financial stress.
“Yet, business confidence will be restrained to an extent on account of unrelenting global factors. On a reassessment of balance of risks, the GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced,” Rajan said in the policy statement.
Today’s review could turn out be the last policy anchored by Rajan if the proposed Monetary Policy Committee (MPC) is put in place before the next review due on August 9.
On further monetary policy transmission, he said, it will support the revival of growth that continues to be critical.
“The Government’s reform measures on small savings rates combined with the Reserve Bank’s refinements in the liquidity management framework should help the transmission of past policy rate reductions into lending rates of banks. The RBI will shortly review the implementation of the Marginal Cost lending Rate framework by banks,” he said.
Timely capital infusions into constrained public sector banks will also aid credit flow, he added.
The Budget has made Rs 25,000 crore provision for recapitalisation of the PSU banks for the current fiscal.
Commenting on the status quo policy, Yes Bank Managing Director Rana Kapoor said “I foresee RBI’s cautious stance giving way to accommodative actions in August, on the back of favorable monsoon outcomes and acceleration of reforms.”
On the liquidity front, which has been concern for the banks and industry for quite some time, Rajan said RBI will continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from 1 per cent of NDTl to a position closer to neutrality.
Consequently, the reverse repo rate under the lAF will remain unchanged at 6 per cent, and the marginal standing facility rate and the bank rate at 7 per cent.
RBI Governor Raghuram also said he is not “overly perturbed” by surrender of Payments Bank licences by some companies but indicated that there could be a mechanism to ensure that entities apply for licences after due diligence as there is a cost involved in vetting them.
Three entities -- Tech Mahindra, Cholamandalam Investment and Finance Company and a consortium of Dilip Shanghvi, IDFC Bank and Telenor Financial Services -- have decided to back out of the Payments Bank licencing.
“We are not overly perturbed that some people decided after analysis that they would not go forward. In fact it suggests that licencing has been adequately liberal and that we have a variety of players coming in,” he said at a press conference after announcing the second bi-monthly monetary policy for the current fiscal.
last August, RBI gave in-principle approval to 11 applicants including Department of Posts, Aditya Birla Nuvo, Airtel M Commerce Services, Fino PayTech, National Securities Depository, Reliance Industries, Tech Mahindra and Vodafone m-pesa for setting up payments banks.
Rajan said: “We gave out licences to anybody we thought have the appropriate qualifications to run a Payments Bank. We presume that they also analysed potential business prospects. After doing further analysis and seeing the other players who are coming in, some of them decided to back off.
Keeping the suspense alive, Raghuram Rajan said it will be “cruel” of him to “spoil the fun” media was having with speculation over his extension even as he enumerated an “unfinished agenda” on financial inclusion and cleaning up of books of PSU banks.
He also said that a decision is reached in such cases “after discussions between the government and the incumbent”.
Amid intense speculation on whether he would continue or not as RBI Governor, an otherwise outspoken Rajan came armed with a “prepared statement” on this issue to his customary post-policy press conference and read it out word-to-word when asked whether he would be there in September-October period.
“As far as the question of me continuing in this position after September 4 goes, it would be cruel of me to spoil the fun the press is having,” said Rajan, whose three-year term ends on September 3.
The Governor also said he is “intrigued” by the many letters purported to be written by him which keep coming up in the press, apparently referring to some unconfirmed reports that he was concerned about markets getting impacted by speculation surrounding his continuation.
“... A decision is reached after discussions between the government and the incumbent. I am sure you will know when there is news. I cannot do better than point you to the statements of the Finance Minister and the Prime Minister on this,” Rajan said while sticking to the written script.
In an interview to PTI last week in Tokyo, Finance Minister Arun Jaitley had denounced the personal attacks on Rajan saying the debate should be about issues and policies, and not about the personalities, while Prime Minister Narendra Modi told WSJ recently that appointment of the RBI Governor was an “administrative subject” which was none of media’s business.
The ruling BJP’s recently nominated Rajya Sabha member Subramanian Swamy has been vociferously attacking Rajan’s inflation-focused policies on interest rate, questioning his commitment to the nationalistic cause as he was “not mentally fully Indian”.