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RBI keeps door open for rate cut

Holds policy rates, retains stance at calibrated tightening; to watch inflation; moves to spur lending

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Urjit Patel
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The Reserve Bank of India (RBI) has not ruled out a cut in interest rates in its next policy review if muted inflation remains sheltered from upward swings in food and global oil prices. It also retained the GDP growth estimate at 7.4% for the current fiscal while unveiling its fifth bi-monthly monetary policy for 2018-19 on Wednesday.

Lowering its retail inflation forecast for the second half of the fiscal to 2.7-3.2% from 3.9-4.5% earlier, RBI feels that it has space to frame a monetary policy that would nurture faster economic growth if the upside risks remain caged. The shift away from a pause in interest rates will further stimulate credit growth and economic activity. The credit growth at the end of November was at 15.3% flowing into a number of sectors.

"If the upside risks we have flagged do not materialise or are muted in their impact on the incoming data, there is a possibility of space opening up for commensurate policy actions by the monetary policy committee," RBI governor Urjit Patel said at a post-policy press conference.

The Indian economy is sitting on wings that are ready to fly as credit growth is getting more broad-based, weaker sectors are showing signs of recovery and food prices are tamed. A strengthening rupee also means lower risks to inflation.

Even on the NBFC cash crunch that was frightening the markets, RBI said there is little to worry as liquidity support will come from the central bank.

Measures over the last two months have eased liquidity for NBFCs and there is no necessity for the RBI to extend help to the crisis-hit sector as a lender of last resort,"said Viral Acharya.

"If the upside risks we have flagged do not materialise or are muted in their impact on the incoming data, there is a possibility of space opening up for commensurate policy actions by the monetary policy committee," RBI governor Urjit Patel said at a post-policy press conference.

However, for now, RBI has left the repo rate (rate at which RBI lends to banks) unchanged at 6.50%, while sharply bringing down the inflation forecast for the second half of the fiscal on softening food and global crude oil prices. Unveiling its fifth bi-monthly monetary policy for 2018-19 on Wednesday, the RBI said that the decision to keep the policy rate was unanimous, but one monetary policy committee member (MPC) member voted for a change in policy stance from the existing calibrated tightening to neutral.

Despite the downward revision in its inflation forecast, the MPC decided to keep its policy stance unchanged at "calibrated tightening". The MPC highlighted the risk of "sudden reversal" in food prices, uncertainty regarding the impact of new minimum support price (MSP) for certain crops (around 24% hike announced by the government for the current Kharif season), volatility in oil prices and global financial markets as the main reasons to keep its stance unchanged.

RBI is keeping vigil on the sustainability of low inflation before it decides to lower key policy rates. "Given the assessment that growth will likely remain healthy for the rest of the year, the MPC retained its stance at calibrated tightening so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals," Patel said.

"The RBI decision to keep rates on hold was more in consonance with market expectations but the policy guidance was a pleasant and pragmatic surprise. The significant downward revision in inflation projections and assurance of continued durable liquidity was most reassuring to market participants in terms of a stable and predictable interest rate structure," State Bank of India chairman Rajnish Kumar said.

Not all participants are buying the RBI governor's dovish stand on interest rates and believe a prolonged pause in interest rates is on the cards. "Despite markets' interpreting RBI governor Patel's post-policy comments as dovish, we don't concur. In our view, policy rates are on course for a prolonged pause," DBS Bank said in its report.

B Prasanna, head - global markets group, ICICI Bank, said, "Going forward, we believe the MPC is likely to remain on a prolonged pause. This also gives us confidence that the scope for a cut in rates becomes possible if realised inflation in the next few months were to confirm or undershoot the revised path forecasted by the MPC."

HIGHLIGHTS

  • RBI leaves repo rate unchanged and sharply lowers inflation forecast to 2.7-3.2%; cites falling oil prices and benign food prices as reason for doing so
     
  • No reason to use CRR when RBI has other instruments at its disposal
     
  • Statutory Liquidity Ratio (government bond holding) to be cut from 19.5% to 18% 
     
  • The cuts will be 0.25% every quarter starting from the January-March quarter
     
  • Retains GDP growth estimate at 7.4% for current fiscal 
     
  • Home loans, car loans to be pegged to external benchmark like the repo
     
  • Credit growth pegged at 15% and more broad based
     
  • Transparency in retail loan pricing and credit to Micro Small and Medium Enterprises

Permitting non-residents to hedge their rupee interest risk is a welcome move providing the much-needed fillip to rupee rate derivative market 
Rajnish Kumar, chairman, State Bank of India

The lowering of the SLR by 25 bps will provide impetus to the system for enhanced liquidity leading to increase in credit dispensation 
Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank 

Minimum level of ‘loan component’ in working capital finance for larger borrowers to promote greater credit discipline 
D Mohapatra, MD & CEO, Bank of India

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