In its maiden review on Tuesday, the Monetary Policy Committee ( MPC) decided to cut policy rate by 25 basis points, as the recent fall in inflation seemed more durable than just an outcome of a positive base effect.
All six members of the committee, including newly appointed Reserve Bank of India ( RBI) Governor Urjit Patel, met and deliberated for two days before unanimously voting in favour of a cut in the repo rate, which now stands at 6.25 per cent.
“The decision of the MPC is consistent with an accommodative stance of monetary policy, in consonance with the objective of achieving Consumer Price Indexbased inflation at 5 per cent by Q4 of 2016- 17 and the medium- term target of 4 per cent within a band of +/- 2 per cent, while supporting growth,” the fourth bi- monthly monetary policy statement read.
“The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors.” Patel, conducting his first monetary policy review as RBI governor, expressed hope that banks would pass on the rate cut. However, the bankers did not appear ready to commit immediately and said transmission “ would happen eventually”.
“Banks will continue to transmit rates based on evolving liquidity scenario,” said Arundhati Bhattacharya, chairman, State Bank of India/
“For the busy season of the financial year, a cut in repo rate by 25 basis points is indeed a welcome sign. With MCLR already stabilised, the pass through of this cut is expected to be quite swift,” said Ashwani Kumar, chairman and managing director, Dena Bank.
The rate cut was not entirely surprising but not everyone could predict it. In a poll of 10 economists, bankers and market participants, six had expected the central bank to pause but move decisively towards a rate cut in December policy review.
Retail inflation for the month of August fell to 5.05 per cent from 6.07 per cent in July. Food prices, which constitute roughly 50 per cent of the headline number, fell to 5.91 per cent from 8.35 per cent in the same period as prices of pulses and vegetables tumbled. “It ( MPC) notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation — which holds the key to future inflation outcomes — rather than merely the statistical effects of a favourable base effect,” the policy statement read. Even as fuel inflation has moderated steadily through the year so far, inflation excluding food and fuel remained sticky around 5 per cent, mainly in respect to education, medical and personal care services, which led the household expectation of inflation to inch forward. On the corporate side, even as input costs in the manufacturing sector have firmed up slightly, “ but the presence of considerable slack has restrained their transmission into corporate pricing power.” In short, the low inflation is here to stay and the committee “ envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bi- monthly monetary policy statements of June and August respectively,” the central bank said. The markets cheered the rate cut. The yields on the most traded 10- year bond fell six basis points and rupee strengthened to close at 66.46 a dollar from its previous close of 66.58 a dollar. Patel started the post- monetary policy conference, a brief and rather hurried affair, with a warning that global growth is in a downhill trajectory, led by weak trade.
“For the first time in a long time the weak global demand is actually going to drag down trade volumes to decline. It is possible that at the IMF meetings this week there will be a further possible downgrading of global growth. I will be surprised if there isn’t,” Patel said, adding the global central banks “ continue to pose uncertainty for emerging markets causing volatility in EMs due to mixed US macro data as it also in the EU.” But India may not have to worry as much. The RBI said the momentum of growth was expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award.
Nevertheless, the continuing sluggishness in world trade would further slacken external demand going forward and RBI chose to retain the projection of growth of real gross value added ( GVA) for 2016- 17 at 7.6 per cent.
In the policy press conference, RBI executive director Michael Patra said globally the ‘ neutral’ rates of various economies are coming down and India should not be an exception. The neutral rate can be defined as the real interest rate at which an economy can grow at its full potential without incurring destabilising high inflation. Real interest rate is calculated roughly as the policy rate minus inflation. RBI previously had said the neutral real interest rate of the country is between 1.5 and 2 per cent. Now it seems RBI favours a neutral rate of around 1.25 per cent. When the policy rate was 6.5 per cent and inflation was close to 5 per cent, the real interest rate was 1.5 per cent. However, Michael Patra said the neutral real interest rate for India could be brought down to 1.25 per cent, which is the case now with a cut of 25 basis points. “ We need to take into account the global situation where in the neutral rates are actually declining.
So it could be around 1.25 or thereabouts,” said Patra at the post policy conference.
Nomura India economist Sonal Varma termed the rate cut as a ‘ surprise’. According to Nomura, even as RBI has offered no forward guidance, Patra’s statement on neutral rate “ has increased uncertainty over the policy path… We currently do not expect another cut,” Nomura said.
“... RBI’s cut today and the changed stance on real rates suggest that the tenets of the flexible inflation targeting framework, as interpreted by the previous RBI governor ( Dr. Rajan) and the current governor ( Dr. Patel), have implicitly changed,” Varma of Nomura wrote in her research report.
In the fourth bi- monthly policy, RBI also initiated several measures, including tweaking a restructuring norm, that will help the banking system clean the bad debt in their books. “The NPA situation is an important issue for the RBI. We will deal with the situation with firmness but also with pragmatism so that the economy does not feel any lack of credit to support the growth of the economy,” Patel said in his statement.
“We must remember that the situation has not appeared overnight and therefore will require skill and thoughtful endeavour to resolve,” said the RBI governor.
Business Standard New Delhi,05th September 2016
Comments
Post a Comment