RBI keeps repo, CRR unchanged; Rajan says banks not passing benefits to consumers
While keeping key rates unchanged, the RBI Governor expressed displeasure that despite a generalised fall in the cost of funds, banks have not yet passed these effects and benefits of policy rate cut from 15th January, into the spectrum of lending rates
The Reserve Bank of India (RBI), in its sixth bi-monthly credit policy review on Tuesday has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged. Earlier on 15th January, the central bank cut repo rate by 25 basis points to 7.75% from 8%.
However, despite a rate cut on 15th January, several banks have not yet passed the benefit to consumers, the RBI governor said. "Easing inflationary pressures strengthened the impact of comfortable liquidity conditions on market interest rates; sovereign and corporate bond yields declined by 50 basis points and more in Q3. However, despite a generalised fall in the cost of funds, banks have yet to pass through these effects, as also the effects of the policy rate cut on 15th January, into the spectrum of lending rates," Dr Raghuram Rajan said in a statement.
With no change in key policy rates, the repo rate (the rate at which the RBI lends money to banks) remains at 7.75%. Similarly reverse repo rate (the rate at which the RBI borrows from banks), CRR, and bank rate remains at 6.75%, 4.00% and 8.75%, respectively. However, the central bank has reduced statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points to 21.5% from 22.0% of their net demand and time liabilities (NDTL) from the fortnight beginning 7 February 2015.
The RBI governor said, “While inflation declined faster than expected due to favourable base effects during June-November, the upturn in December turned out to be muted relative to projections. Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since 15th January (when RBI cut repo rate), it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance.”
Commenting on the RBI monetary policy, Arundhati Bhattacharya, Chairman, State bank of India (SBI) said, "RBI policy was in line with market expectations of a status-quo. The SLR cut is expected to provide growth supportive liquidity of about Rs45,000 crore. The flexibility regarding the DCCO will enthuse companies with strong balance sheets to consider taking over stuck Projects. With inflationary expectations at a 21 quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle."
According to the central bank, the upside risks to inflation stem from the unlikely possibility of significant fiscal slippage, uncertainty on the spatial and temporal distribution of the monsoon during 2015 as also the low probability but highly influential risks of reversal of international crude prices due to geo-political events. Heightened volatility in global financial markets, including through the exchange rate channel, also constitute a significant risk to the inflation assessment. Looking ahead, inflation is likely to be around the target level of 6% by January 2016. As regards the path of inflation in 2015-16, the Reserve Bank said it will keenly monitor the revision in the CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements.
In a research report, Nomura said, it does not see the room for (RBI) aggressive easing in the current rate cut cycle. "We expect the RBI to deliver one more 25 basis points rate cut at the April policy and then leave the repo rate unchanged at 7.50% thereafter. This is because, we do not expect further sustained disinflation (rather, we expect CPI inflation to stabilise in the 5.0-5.5% range in 2015-16); and we expect real GDP growth to pick up gradually, which should result in a gradual narrowing of the output gap. In this environment, we believe the RBI's policy stance has to remain neutral to tight to ensure CPI inflation remains in the range of 4% the medium-term."
Talking about growth, RBI said, the outlook (for growth) has improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects. These conditions should augur well for a reinvigoration of private consumption demand, but the overall impact on growth could be partly offset by the weaker global growth outlook and short-run fiscal drag due to likely compression in plan expenditure in order to meet consolidation targets set for the year, it added.
Accordingly, the baseline projection for growth using the old GDP base has been retained at 5.5% for 2014-15. For 2015-16, projections are inherently contingent upon the outlook for the south-west monsoon and the balance of risks around the global outlook.
Domestically, conditions for growth are slowly improving with easing input cost pressures, supportive monetary conditions and recent measures relating to project approvals, land acquisition, mining, and infrastructure. Accordingly, the central estimate for real GDP growth in 2015-16 is expected to rise to 6.5% with risks broadly balanced at this point. The revised GDP statistics (base 2011-12) released on 30th January along with advance estimates for 2014-15 expected on 9th February will need to be carefully analysed and could result in revisions to the Reserve Bank’s growth projections for 2015-16, the statement said.
Bank to be allowed non-callable deposits
At present, banks are allowed to offer differential rates of interest on deposits on the basis of tenor for deposits less than Rs1 crore and on the basis of quantum for deposits of Rs1 crore and above. Banks are, however, not permitted to differentiate on the basis of any other parameter of the deposit contract. Furthermore, all deposits accepted from individuals and Hindu undivided family (HUF) up to Rs1 crore are callable i.e., have the facility of premature withdrawal.
"This results in asset-liability management issues, especially under the Liquidity Coverage Ratio (LCR) requirement under the Basel III framework. It is, therefore, proposed to allow non-callable deposits. Callability in a deposit will then be a distinguishing feature for offering differential rates on interest on deposits. Detailed guidelines will follow shortly," the RBI said.
The reverse repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 6.75%, and the marginal standing facility (MSF) rate and the bank rate at 8.75%.
Reverse Repo Rate...........6.75%
The first bi-monthly monetary policy statement (for FY2015-16) is scheduled on Tuesday, 7 April 2015.