Members of the media and other attendees queue at the entrance to the reception of the Reserve Bank of India (RBI) in Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg)

RBI Monetary Policy: MPC Holds Rates, Maintains Neutral Stance

  • Repo rate unchanged at 6 percent
  • MPC maintains neutral stance on policy
  • Inflation forecast adjusted upwards by 10 bps to 4.3-4.7 percent for this fiscal.
  • MPC maintains 6.7 percent GVA growth forecast for FY17

The monetary policy committee today voted to keep interest rates unchanged, but maintained a neutral stance allowing it to adjust rates in both directions if needed. The decision was in line with market expectations. A Bloomberg News poll of 46 economists had shown that a majority expected rates to remain unchanged.

Following this review, the benchmark repo rate remains at 6 percent. The reverse repo rate is at 5.75 percent. The decision was taken by 5-1 vote, with Ravindra Dholakia voting for a 25 basis point cut in rates.

The repo rate has been brought down from a high of 8 percent since the start of this interest rate reduction cycle, which began in 2015. This cycle is now coming to a close as inflation starts to pick up even though growth remains weak.

RBI Monetary Policy: MPC Holds Rates, Maintains Neutral Stance

Upside Risks To Inflation

While explaining its decision, the MPC listed upside risks to inflation and increased its inflation projection marginally for the year. It now expects inflation to range between 4.3-4.7 percent in the third and fourth quarters of the current fiscal.

…..the MPC decided to keep the policy repo rate on hold. However, keeping in mind the output gap dynamics, the MPC decided to continue with the neutral stance and watch the incoming data carefully. The MPC remains committed to keeping headline inflation close to 4 percent on a durable basis.
MPC Statement

“We did not consider shifting our stance because nothing between October to now was significant enough in terms of macro outcomes to warrant that,” Reserve Bank of India Governor Urjit Patel said at the press briefing to announce the policy.

Consumer price inflation climbed to 3.58 percent in October from a low of 1.5 percent in June. Core inflation, which excludes volatile food and energy prices, also remains elevated at 4.5 percent in October.

The MPC in its statement cited an increase in food and fuel inflation in recent months as a cause of concern. Inflation expectations have also firmed up, it said. It added that farm loan waivers and likely fiscal slippage will also have implications for inflation.

… implementation of farm loan waivers by select states, partial rollback of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation.
MPC Statement

Growth Forecast Maintained

The MPC maintained its forecast of 6.7 percent GVA growth for the current year, but noted that second quarter growth was weaker than it had anticipated.  Second quarter national income data showed that gross value added growth rebounded to 6.1 percent in the second quarter compared to 5.6 percent in the first quarter.

A shortfall in kharif production and rabi sowing pose downside risks to growth, it said. A pick-up in credit growth, an increase in capital raising from the equity markets, recapitalisation of public sector banks and progress in resolving stressed accounts can aid growth in coming quarters, the MPC said.

However, the MPC notes that the impact of these factors can be buttressed by reducing the cost of domestic borrowings through improved transmission by banks of past monetary policy changes on outstanding loans.
MPC Statement

On liquidity, the MPC refrained from giving any guidance in its statement even though its acknowledged tightening liquidity conditions, which have pushed up bond yields. In the press conference, RBI Deputy Governor Viral Acharya said the central bank expects liquidity conditions to still be in marginal surplus by the end of this fiscal and reach neutrality early next fiscal.

The central bank will continue to manage liquidity conditions through a mix of instruments . It will also consider open market operations if liquidity is required to be injected or absorbed on a durable basis, Acharya said. RBI has mopped up about Rs 90,000 crore through open market bond sales between July and November.

The 10-year benchmark yield has risen by 40 basis points since the start of October to above 7 percent now.

Read more updates here.

‘Reform And Recap Plan’ For Banks

The government’s bank recapitalisation plan will be a “reform and recap package”, RBI Governor Patel said. The recapitalisation will be differentiated across banks as has been pointed out by the government, he added. It will be front-loaded for better-run banks with stronger balance sheets.

This will be a reform and recap package and not just a recap package so as to ensure that this money is used to strengthen public sector bank balance sheets and that we don’t sow the seeds of the next boom and bust cycle of landing.
Urjit Patel, RBI Governor

RBI is in discussions with the government to finalise recapitalisation amount for each bank, the governor added.

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