The Reserve Bank of India (RBI), in its second bi-monthly credit policy review on Tuesday for FY2016-17 has kept the policy rates unchanged. The repo rate will remain at 6.50% while the reverse repo rate under the liquidity adjustment facility (LAF) will also remain at 6%. The marginal standing facility (MSF) rate and the bank rate also remain static at 7.0%.
In a statement, RBI Governor Dr Raghuram Rajan said, "Incoming data since first bi-monthly policy 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. A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures. Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative.The Reserve Bank will monitor macroeconomic and financial developments for any further scope for policy action."
"More monetary transmission to support the revival of growth 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 Reserve Bank will shortly review the implementation of the Marginal Cost Lending Rate framework by banks. Timely capital infusions into constrained public sector banks will also aid credit flow," he added.
Arundhati Bhattacharya, Chairman of State Bank of India (SBI) thinks that capital infusion will be the key going forward to support credit growth. She said, "The decision to keep the repo rate unchanged was as per market consensus. The tone of the policy is fairly balanced, pragmatic and continues to reemphasize that the policy continues to be in accommodative cycle. Inflation trajectory seems broadly in line with RBI prognosis, though we are fairly hopeful of inflation possibly undershooting RBI Jan 2017, 5% target."
Commenting on the RBI policy, Chanda Kochhar, MD and CEO, ICICI Bank said, "The RBI's continued commitment to an accommodative policy stance and the assurance of moving towards a neutral liquidity framework is positive. This should continue to support transmission of RBI's policy stance. Additionally, the reassurance that the RBI stands ready to mitigate any financial volatility resulting out of FCNR deposit maturities due later this year is very welcome. Overall, macro-economic conditions are conducive for an improving growth trajectory as the various policy measures announced by the Government take effect."
With the RBI's accommodative stance still in place, Yes Bank sees a high probability of a rate cut in August by at least 50bps. "It appears that the uncertainties on the global horizon with Fed policy overhang and UK Brexit vote tipped RBI's decision in favour of a status quo. I foresee RBI's cautious stance giving way to accommodative actions in August, on the back of favourable monsoon outcomes and sustained acceleration of Government reforms," says Rana Kapoor, MD & CEO of YES Bank.
Industry body Confederation of Indian Industries (CII) feels that the RBI could have given more emphasis to the need to continue the rate cutting cycle. "Instead, the RBI has chosen to rely on the transmission of lower interest rates to borrowers by the banks. At this time when credit demand is still flat and industry is facing a demand crunch, a rate cut would have done much to restore the investment cycle. CII is hopeful that RBI will resume the rate cutting cycle and support growth impulses in the economy in the next monetary policy," says Chandrajit Banerjee, Director General of CII.
According to the central bank, inflation surprise in April reading makes the future trajectory of inflation somewhat more uncertain. The expectations of a normal monsoon and a reasonable spatial and temporal distribution of rainfall, along with various supply management measures and the introduction of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation, it said.
"In addition," RBI said, "capacity utilisation indicators suggest that the available headroom in industry could keep output prices subdued even as demand picks up. Nonetheless, there are upside risks – firming international commodity prices, particularly of crude oil; the implementation of the 7th Central Pay Commission awards, which will have to be factored into projections as soon as clarity on implementation emerges; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel. Taking these factors into account, the inflation projections given in the April policy statement are retained, though with an upside bias. Considerable uncertainty surrounds these projections (see below), which should be clarified by incoming data in the next few months."
Commenting on the RBI status quo on monetary policy, Dr Arun Singh - lead economist at Dun & Bradstreet India, says, "The upside risk to inflation however received a tad more weightage in the policy statement, turning the spotlight to continued astute food management as well as steady expansion in supply capacity- particularly in services. The focus on efficient transmission of earlier rate cuts has received much emphasis in the policy statement. All eyes are now set on the monsoon rains as it could have potential inflationary or disinflationary pressures."
RBI says it sees domestic conditions for growth are improving gradually mainly driven by consumption demand that is expected to strengthen with a normal monsoon and the implementation of the Seventh Pay Commission award. "Higher public sector capital expenditure, led by roads and railways, should crowd in private investment, offsetting somewhat the subdued appetite for fresh 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, therefore, the gross value added (GVA) growth projection for 2016-17 has been retained at 7.6% with risks evenly balanced," it added.
Saravana Kumar, Chief Investment Officer, LIC Mutual Fund, says, "More monetary transmission to support the revival of growth 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."
Recently released provisional estimate of GVA for 2015-16 marginally scaled down the annual growth rate to 7.2%, on a deceleration of services sector activity in relation to the advance estimates. There was, however, a sequential pickup in activity in fourth quarter of FY2016, in line with expectations.
As regards the current financial year, the India Meteorological Department (IMD) has forecast an above-normal and well-distributed south west monsoon as El Nino wanes – albeit with a slightly delayed onset. Realisation of this prediction is critical for the outlook for agriculture since reservoir levels have been depleted to 17% of capacity – 40% lower than the level a year ago. Even though rabi procurement was lower in April-May 2016 than a year ago, mid-May food stocks at 58 million tonnes were almost three times the norm for first quarter.
The index of industrial production (IIP) decelerated in 2015-16, mainly pulled down by weak manufacturing in an environment of subdued investment demand and weak rural consumption. In May 2016, the manufacturing purchasing managers’ index (PMI) remained subdued on account of slowing output and export orders. However, except for natural gas and crude oil, the core sector registered strong growth in April 2016 on account of a seasonal pick-up in industries like electricity, also supported by a low base. There are signs that corporate performance is improving. Available information on fourth quarter earnings suggests double digit growth in earnings before interest, taxes, depreciation and amortization (EBITDA) levels for non-financial corporates. The Reserve Bank’s latest rounds of forward looking surveys indicate an improvement in the overall business situation, driven by a pick-up in capacity utilisation and in order books – both domestic and external.
"These developments have improved the expectation of business conditions in the first half of 2016-17. Public investment, especially in roads and railways, is gaining strength, though the continuing weakness in private investment is of concern. Demand conditions are likely to improve going forward; consumer confidence is seen as rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon. Rising capacity utilisation should prompt private investment," RBI added.
According to the central bank, some high frequency indicators for April point to a firming recovery, although it is still uneven. It says, "Leading the upturn are cargo traffic at major ports, automobile sales, especially two-wheelers and three-wheelers, commercial vehicle sales, passenger air and freight traffic, cement production and steel consumption. Abstracting from seasonal effects, this suggests that the expansion, especially in the service sector, is getting broad-based. On the other hand, railway freight traffic and passenger car sales have decelerated on sector-specific constraints. Purchasing managers in the services sector indicated slowing new business in May and subdued expectations of future activity."
Ratings agency CRISIL expect another 25bps cut this fiscal. "The RBI's policy stance remains accommodative, but before wielding the knife on interest rates, it will monitor the growth recovery, US fed action, monsoons, trend in food inflation and watch how the things unfold in the money market," it said.
Here are the latest policy rates following RBI review…
Reverse Repo Rate..........6%