RBI keeps benchmark interest rate unchanged for 2nd time

RBI keeps benchmark interest rate unchanged for 2nd time
RBI today left interest rates unchanged for second time in a row awaiting more clarity on inflation trend and impact of demonetisation on growth even as it hinted at no interest-rate cut in immediate future by shunning its long-held "accommodative" monetary policy stance. It lowered economic growth forecast to 6.9 per cent for the current fiscal from 7.1 per cent estimated earlier, but said the economy will bounce back to 7.4 per cent next fiscal.

The broad-based Monetary Policy Committee "decided to change the stance from 'accommodative' to 'neutral' while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out," Reserve Bank Governor Urjit Patel said. The six-member panel voted 6-0 to keep the repo rate unchanged at 6.25 per cent, marking its third straight unanimous decision since September when it was formed. It had cut interest rate by 0.25 per cent in its maiden meeting but held on to the rates in December and again today despite fervent calls for a reduction in rates to boost lending.

At 6.25 per cent, the repo rate is already at a six-year low. Prior to that, RBI had cut interest rates by 150 basis point or 1.5 percentage points since January 2015. RBI projected retail inflation in the range of 4 to 4.5 per cent in the first half of 2017-18 fiscal and between 4.5 per cent to 5 per cent in the second half. The Central Bank said it is "committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner" and this requires further "significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky.

Patel said non-food part of the consumer price index (CPI) has been sticky at 4.8 to 4.9 per cent and had it not been for a destruction of vegetables and other perishables due to junking of old 500 and 1000 rupee notes, retail inflation would have been 140 basis points higher than the 3.4 per cent seen in December. RBI also decided to form a separate enforcement department for stricter enforcement of its regulatory and supervisory actions.

Nudging banks for better transmission of previous reduction in policy rates, Patel said there is still scope for cutting lending rates. However, the RBI said that MPC believes the environment for timely transmission of policy rates to banks lending rates will be considerably improved if the banking sector's non-performing assets (NPAs) are resolved more quickly and efficiently and recapitalisation of the banking sector is hastened.

Also, the formula for adjustments in interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented for transmission of policy rates. The next meeting of the MPC is scheduled on April 5 and 6, 2017.

The RBI further said demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand.

It further said surplus liquidity should decline with progressive remonetisation. Nonetheless, the currently abundant liquidity with banks is likely to persist into the early months of 2017-18. According to the RBI, high frequency indicators point to subdued activity in the services sector, particularly automobile sales across all segments, domestic air cargo, railway freight traffic, and cement production.

Nevertheless, some areas stand out as bright spots, having weathered the transient effects of demonetisation – steel consumption, port traffic, international air freight, foreign tourist arrivals, tractor sales and cellular telephone subscribers.
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