It's status quo! Key takeaways from RBI rate review

Headed by Urjit Patel, MPC for the fourth straight time kept the repo rate unchanged, at which it lends to the banks, at 6.25 per cent. The reverse repo, at which RBI borrows, will be 6 per cent.

The Reserve Bank on Wednesday left lending rates unchanged citing risks to inflation due to spurt in farm loan waivers by states but raised lending capacity of banks to support economic growth.

The government has been pressing for a cut in interest rates to increase private investment and had sought a meeting with the members of the Monetary Policy Committee, but RBI Governor Urjit Patel said that all of them declined to meet.

Senior officials of the finance ministry were scheduled to meet MPC members on June 1 and 2 but all six members decided against the meeting.

Headed by Patel, MPC for the fourth straight time kept the repo rate unchanged, at which it lends to the banks, at 6.25 per cent. The reverse repo, at which RBI borrows, will be 6 per cent.

"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," RBI said in its second bi-monthly monetary policy review for 2017-18.

For the first time one member differed on RBI policy rate decision

Five members were in favour of the monetary policy decision of maintaining the status quo, while Ravindra H Dholakia was not, it said.

The central bank has however slashed the Statutory Liquidity Ratio (SLR) or the percentage of deposits that banks have to park in government securities, by 0.5 per cent to 20 per cent. The move is expected to raise buoyancy in the loans market as banks would have slightly higher funds for lending.

"The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place,” it said.

On farm loan waivers

RBI raised concerns over the possibility of fiscal slippages due to the farm loan waivers.

Patel said unless that state governments' budgets allow that fiscal space to go in for a loan waiver, it would be risky to tread on that path.

"The risk of fiscal slippages, which by and large can entail inflationary spillovers, has risen with the announcements of large farm loan waivers, the RBI said in its second bi-monthly monetary policy review for 2017-18.

Patel said that the risk of going down the "slippery path" of waiver could dissipate the important gains that the states made in fiscal rectitude over the last 2/3 years.

"Past episodes in our country had shown that when there are significant fiscal slippages they do permeate to inflation sooner or later. So, it is a path that we need to tread very carefully and before it gets out of hand," he said.

On Tuesday, Maharashtra Chief Minister Devendra Fadnavis had said the government will announce a loan waiver before October 31 and about 1.07 crore farmers with less than five acres of land would be eligible for it.

Earlier, in April, the Uttar Pradesh government had waived farm loan worth Rs 36,000 crore and if Maharashtra implements the waiver scheme, it would cost the state exchequer an estimated Rs 30,000 crore.

Farmers in Madhya Pradesh too have been agitating since June 1 seeking loan waivers, higher minimum support prices and other benefits.

On inflation

At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award are upside risks, it said.

On GDP

The Central Statistics Office (CSO) has pegged the growth of real gross value added (GVA) for 2016-17 at 6.6 per cent, 0.1 percentage point lower than the second advance estimates released in February 2017.

"With the CSO's provisional estimates for 2016-17, the projection of real GVA growth for 2017-18 has accordingly been revised 10 bps downwards from the April 2017 projection to 7.3 per cent, with risks evenly balanced," the central bank said in its second bi-monthly monetary policy, 2017-18.

The resolution of the MPC also said rising input costs and wage pressures may prove a drag on the profitability of firms, pulling down overall GVA growth.

On demonetisation

Hit hard by demonetisation, India lost the tag of the fastest growing economy to China in the March quarter with a GDP growth of 6.1 per cent, pulling down the 2016-17 expansion to a three-year low of 7.1 per cent.

The bank, however, said that the continuing remonetisation "should enable" a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy.

Also, the reductions in banks' lending rates post-demonetisation "should support both consumption and investment demand of households and stress-free corporates", it said.

GST will not fuel inflation

The headline inflation has come down to 3 per cent in April 2017, while demonetisation continues to impact GDP growth which dipped to 6.1 per cent in the last quarter of the last fiscal.

There is also greater clarity on the rainfall, with the IMD predicting a normal monsoon this season which can help the food inflation situation.

Moreover, RBI said, the implementation of the Goods and Services Tax (GST) is not expected to have a material impact on overall inflation.

Government intends to roll out GST from July 1.

Neutral view

The RBI shifted its policy stance to "neutral" in early 2017, allowing it the flexibility to move in either direction, from "accommodative" stance for two years.

It followed that up with statements at the last policy review about worries of inflation rising to 5 per cent in the second half of fiscal 2017-18 and also the need to get the price-rise number to its target of 4 per cent in a credible way.

On Union Budget

RBI said government spending continues to be robust, cushioning the impact of a slowdown in other constituents.

"The implementation of proposals in the Union Budget should crowd in private investment as the business environment improves with structural reforms, including the GST, the Insolvency and Bankruptcy Code, and the abolition of the Foreign Investment Promotion Board," it said.

On balance sheet woes

The twin balance sheet problem -- over-leveraged corporate sector and stressed banking sector -- may delay the revival in private investment demand, it said.

As per the RBI, gold imports surged in volume terms, initially driven by seasonal and festival demand but subsequently by stockpiling in anticipation of the roll out of the goods and services tax (GST).

Photograph: Danish Siddiqui/Reuters