Bank Recap Plan Will Also Be A Reform Process, Says RBI Governor

The Urjit Patel-led Monetary Policy Committee maintained the repo rate at 6 percent with five members voting in favour of it and one member voting for a cut. A Bloomberg News poll of 46 economists had shown that a majority expected rates to remain unchanged.

Here are some key highlights from the MPC’s statement:

• Moderation in inflation excluding food and fuel has, by and large, reversed
• Recent rise in oil prices may sustain
• Impact of Housing Rent Allowance is expected to peak in December
• Recapitalisation plan may help improve credit flows

Governor Urjit Patel said that the RBI is in discussions with the government to finalise recapitalisation amount for each bank and that the plan will also be a reform process for the banks.

Also Read: Interest Rates Steady, Stance Neutral

The monetary policy was in-line with the street’s expectations but also cautioned against the upside risks emanating from high commodity prices, global financial instability, Housing Rent Allowance related increases, rising input costs and fiscal slippages, noted Upasna Bhardwaj, senior economist at Kotak Mahindra Bank Ltd.

There will be a marginal surplus liquidity in the banking sector by the end of the financial year, said Deputy RBI Governor Viral Acharya at the press briefing.

The central bank will consider open market operation to manage liquidity on a durable basis, he said. India’s banking system saw a surge in deposits after demonetisation in November 2016 and the ongoing foreign exchange operations. However, the liquidity has moderated since and will continue to move towards "neutrality”, the deputy governor added.

The RBI has worked closely to finalise the extent of funding to be raised by the banks and the amount of recapitalisation bonds they will issue, said central bank Governor Urjit Patel at the press conference after the announcement of the policy. Here are the key highlights.

• Recapitalisation bonds will be front-loaded for banks with prudent balance sheet management
• Others will recieve contributions based on their resolve to become "slim and trim" in a time bound manner
• Governance reforms will also feature as part of the overall plan

The Finance Ministry recently announced a Rs 2.11 lakh public sector bank recapitalisation plan which is expected to deleverage the government-owned banks to an extent and allow for the economy’s credit cycle to regain momentum. The plan will also “enhance allocative efficiency” of the banks, the RBI statement said.

• Moderation in inflation excluding food and fuel has, by and large, reversed
• Impact of HRA is expected to peak in December
• Recent rise in oil prices may sustain
• Seasonal moderation in vegetable price expected
• Lower GST rates should translate into lower retail prices
• GVA growth in the second quarter was lower than projected in October review
• Recent increase in oil prices may have a negative impact on margins of firms and GVA growth.
• Shortfalls in kharif production and rabi sowing pose risks to agriculture outlook
• Recapitalisation plan may help improve credit flows

Also Read: Interest Rates Steady, Stance Neutral

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. Along with the repo rate, the reverse repo rate and the cash reserve ratio were also maintained at 5.75 percent and 4 percent respectively.

The decision was supported by five members of the monetary policy committee including RBI governor Urjit Patel while one member voted for a policy rate reduction of 25 basis points.

The central bank’s bi-monthly policy is expected to keep two things in mind.

• Inflation which is rising, but has been subdued
• Pace of economic recovery

If the RBI is uncomfortable with the inflationary pressure arising from increasing commodity prices, they could maintain their neutral stance keeping the repo rate at 6 percent.

Consumer price inflation has climbed to 3.58 percent in October from a low of 1.5 percent in June. While it remains below the Reserve Bank of India’s flexible inflation target of 4 percent (+/- 2 percent), the central bank expects it to move closer to 4.6 percent by the end of the fourth quarter. Core inflation, which excludes volatile food and energy prices, also remains elevated at 4.5 percent in October.

At the same time if the monetary policy committee is of the opinion that the country needs further stimulus to recover from the twin shocks of demonetisation and Goods and Services Tax rollout, then they might reduce the credit rate.

Second quarter national income data showed that GVA (gross value added) growth rebounded to 6.1 percent in the second quarter compared to 5.6 percent in the first quarter. Deconstructed data showed that growth in consumer spending weakened while gross fixed capital formation strengthened.

Also Read: Policy Day Guide: Key Questions For The MPC To Debate

The monetary policy committee will deliver its fifth review of the financial year on Wednesday. A poll by Bloomberg News suggests that most economists expect a status quo policy. Forty-one of 46 economists polled expect the repo rate to remain unchanged at 6 percent, while a small minority expects another 25 basis point cut to 5.75 percent.

Most economists also expect the Reserve Bank of India to maintain its neutral stance, giving the central bank flexibility to move in either direction, should economic data throw up any surprises in the coming months.