The Reserve Bank of India (RBI) lowered its policy interest rate by 25 basis points (bps) and said the future course of inflation would depend uponacombination of factors, including states implementing farm debt waivers.
The sixmember Monetary Policy Committee (MPC) observed the inflation rate had fallen toahistoric low but “aconclusive segregation of transitory and structural factors driving the disinflation is still elusive”.
After the latest policy review, the repo rate, at which the central bank lends to banks, stands at 6 per cent.
The RBI maintained its neutral monetary stance.
The rate cut was part of its calibrated approach based on the data available, RBI Governor Urjit Patel said inapostpolicy conference.
“We could have stronger growth by removing infrastructure bottlenecks, finding measures to reinvigorate private investments and providingathrust to government´s affordable housing initiative, which hasapotential for very strong multiplier effects,” Patel said. “Addressing the twin balance sheet problem remains the RBI´s top priority,” RBI Deputy Governor Viral Acharya said, referring to the financial stress faced by banks and companies.
Five of the six MPC members voted in favour ofarate cut.
Continuing with his previous stance, Ravindra Dholakia voted fora50bp cut. RBI Executive Director Michael Patra preferred a pause.
Acharya said the central bank was comfortable withareal interest rate of 1.75 per cent, the difference between the policy rate of 6 per cent and projected inflation ofalittle over 4 per cent.
This, some in the markets perceived, as an indication that the room forarate cut was limited or non existent.
The rupee strengthened to close atatwoyear high of 63.70 a dollar, as high interest rates make India attractive to foreign investors.
Even as State Bank of India (SBI) lowered its savings account deposit rate by 50 bps on Monday, the RBI governor said banks had held on to rates in segments other than the competitive housing and automobile loans.
“There is scope for banks to reduce lending rates for those segments,” Patel said.
Bank bosses like Arundhati Bhattacharya of SBI and Chanda Kochhar of ICICI Bank remained non committal on lending rate cuts.
Rana Kapoor, managing director and chief executive officer of YES Bank, said he saw “incremental rate cuts to the tune of 5075 bps in coming months”.
Subhash Chandra Garg, secretary in the Department of Economic Affairs of the finance ministry, said the rate cut was an important step for sustained growth and moderate inflation.
“The RBI´s bias continues to be hawkish about mediumterm inflation,” said Deutsche Bank´s Chief India Economist Kaushik Das, adding this could be the end of the RBI´s ratecutting cycle.
However, Indranil Sengupta, India economist for Bank of America Merrill Lynch, said there could be another 25bp rate cut by December.
The RBI retained its inflation forecast at 23.5 per cent for the first half of the year and 3.5- 4.5 per cent for the second half.
The trajectory of inflation would be determined by implementation of the Seventh Pay Commission´s recommendations on house rent allowance (HRA), price movements after the imposition of the goods and services tax, and the “disentangling of the structural and transitory factors shaping food inflation”, the RBI said. “Implementation of farm loan waivers by states may result in possible fiscal slippages and undermine the quality of public spending, entailing inflationary spillovers,” the policy statement said.
“If states choose to implement salary and allowance increases similar to the Centre in the current financial year, headline inflation could rise by an additional estimated 100 bps above the baseline over 1824 months,” the RBI said.
Excluding the HRA effect, headline inflation would bealittle above 4 per cent by the fourth quarter, Patel said.Agood monsoon and moderation in price increases would work as dampers, he added.
The RBI, however, noted households appeared to have discounted the recent low inflation and their inflation expectations had hardened.
The RBI kept its GDP growth projection unchanged at 7.3 per cent, but pointed out growth impulses in industry and services could be weakening.
“The MPC was of the view that there is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to affordable housing,” the policy statement said.
According to Patel, stakeholders should come together for speedier implementation and clearance of affordable housing at the state government level.
The government and the RBI were also working to resolve bad debts and to recapitalise public sector banks, Patel said.
These measures would help restart credit flows, he added.
Acharya said the investment slowdown was rooted in the bank balance sheet issues.
Acharya said the RBI will take steps to improve financial intermediation like allowing triparty repo transactions in corporate bonds, developingapublic credit registry, and aligning the marginal cost of fundsbased lending rate to market rates.
The Business Standard, New Delhi, 03rd August 2017
Comments
Post a Comment