The Reserve Bank of India (RBI), in its third 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, "Risks to the inflation target of 5% for March 2017 continue to be on the upside. Furthermore, while the direct statistical effect of house rent allowances under the 7th Central Pay Commission (CPC)’s award may be looked through, its impact on inflation expectations will have to be carefully monitored so as to pre-empt a generalisation of inflation pressures. In terms of immediate outcomes, much will depend on the benign effects of the monsoon on food prices. In view of this configuration of risks, it is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action. The stance of monetary policy remains accommodative and will continue to emphasise the adequate provision of liquidity. Easy liquidity conditions are already prompting banks to modestly transmit past policy rate cuts through their marginal cost of funds based lending rate (MCLRs) and pro-active liquidity management should facilitate more pass-through."
Here are the latest policy rates following RBI review…
"The recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year. Moreover, prices of pulses and cereals are rising and services inflation remains somewhat sticky. There are early indications, however, that prices of vegetables are edging down. Going forward, the strong improvement in sowing, on the back of the monsoon’s steady progress, along with supply management measures, augurs well for the food inflation outlook. The prospects for inflation excluding food and fuel are more uncertain; if the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation. In addition, the full implementation of the recommendations of the 7th CPC on allowances will affect the magnitude of the direct effect of house rents on the CPI. On balance, inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside, are retained," Dr Rajan, who is stepping down next month, said in his last monetary policy statement.
Commenting on the policy review, Arundhati Bhattacharya, Chairman of State Bank of India (SBI) said, "The RBI decision to maintain status-quo was as per market expectations. The decision to frontload liquidity provisions through an announcement of open market option (OMO) is a well thought out move as capital flows have been relatively slow this year given the global uncertainties, resulting in lower net foreign exchange acquisition. We believe transmission of rates will happen gradually over the next few months as credit growth picks up pace".
Looking ahead, the RBI says, the momentum of growth is expected to be quickened by the normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to consumption spending that can be expected from the disbursement of pay, pension and arrears following the implementation of the 7th CPC’s award. The passage of the goods and services tax (GST) Bill augurs well for the growing political consensus for economic reforms.
"While timely implementation of GST will be challenging, there is no doubt that it should raise returns to investment across much of the economy, even while strengthening government finances over the medium-term. This should boost business sentiment and eventually investment," the central bank added.
RBI feels the current accommodative stance of monetary policy and comfortable liquidity conditions should also provide a congenial environment for the reinvigoration of aggregate demand conditions. However, successive downgrades of global growth projections by multilateral agencies and the continuing sluggishness in world trade points to further slackening of external demand going forward. Accordingly, RBI retained the gross value added (GVA) growth projection for 2016-17 at 7.6%, with risks facing the economy at this juncture evenly balanced around it.