As widely expected, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept key rates unchanged.
It cited adverse risks to the inflation trajectory in its fifth bi-monthly monetary policy here on Wednesday. Maintaining a neutral stance, the RBI left the repo rate unchanged at 6 per cent, the reverse repo at 5.75 per cent and the marginal standing facility rate at 6.25 per cent. Five of the six members of the committee were in favour of the decision, while one (RavindraDholakia) voted again for a 25 basis points (bps) cut.
Bonds reversed losses after the policy outcome, with the benchmark 10-year yield falling two basis points to 7.04 per cent. Over the last three years, in the rate easing cycle that began in January 2015 till December 2017, repo rate has been brought down by 200 bps from, with the last rate cut delivered in August 2017.
Bankers said they do not foresee any rate cuts this financial year as the RBI raised the fiscal second-half inflation estimate range by 10 bps to 4.3-4.7 per cent on the back of sticky core prices, staggered impact of house rent allowance increases by states and hardening of crude oil prices.
The RBI is primarily mandated to target inflation and remains committed to keeping headline inflation close to 4 per cent on a durable basis, it said.
It, however, sounded optimistic about economic growth maintaining the gross value added (GVA) growth guidance at 6.7 per cent for FY18 with a likely negative impact from peaking crude oil prices hurting corporate margins and shortfall from kharif production and rabi sowing, but added that these risks could be offset by a pick-up in credit growth potentially fuelled by the PSU bank recapitalisation and improvement in demand for service and infrastructure.
RBI warns of fiscal slippage
The central bank warned that a reduction in GST rates, partial roll-back of duties on petroleum products and farm loan waivers by some states may lead to ‘fiscal slippage’ fuelling inflation.
Speaking to reporters at the monetary policy press conference, Urijit Patel, governor RBI said that they are working with the government on the bank recapitalisation package, which would be released in the next few days.
Patel said that the recapitalisation bonds might be frontloaded in case of strong banks.
The MPC also confirmed that the surplus liquidity in the financial system had been largely neutralised by the RBI’s open market operations (OMOs).
Surplus liquidity continued to decline as the net average daily absorption of liquidity under the Liquidity Adjustment Facility (LAF) went down from Rs 1,40,000 crore in October 2017 to Rs 71,800 crore in November.
Patel also ruled out the possibility of any special dividend to the government out of profits for last fiscal year.
Banks should cut rates, says Patel
The RBI governor also pointed out that there have been several significant developments in the recent period, which augur well for growth prospects, going forward.
“First, capital raised from the primary capital market has increased significantly after several years of sluggish activity. As the capital raised is deployed to set up new projects, it will add to demand in the short run and boost the growth potential of the economy over the medium-term. Second, the improvement in the ease of doing business ranking should help sustain foreign direct investment in the economy. Third, large distressed borrowers are being referenced to the insolvency and bankruptcy code (IBC) and public sector banks are being recapitalised, which should enhance allocative efficiency. 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,” he said.
Said Rajni Thakur, economist, RBL Bank, “In view of short term uncertainties on the price trajectory, further policy action will largely remain data dependent. We, however, expect a prolonged paused on rate action for now.”
Asutosh Kumar Mishra - senior research analyst Reliance Securities said, “Apart from the local factors, development at the international front also indicates that further monetary policy easing will be difficult in the current fiscal year. We expect that higher fuel price will eventually get transmitted into inflation rates as well negatively impact fiscal deficit estimates of the government”.