Published On: Wed, Feb 8th, 2017

RBI maintains status quo on key lending rate

Mumbai: India’s central bank on Wednesday kept key lending rates unchanged, saying it awaits more data on inflation trends and on the impact of demonetisation on economic growth, even as it shifted its monetary policy stance from accommodative to neutral citing inflationary fears and global uncertainties. The industry expressed disappointment at the decision.

RBI projected a 7.4 per cent GVA growth for 2017-18

Soon after the policy review, the RBI also announced that the limits on savings bank cash withdrawals post-demonetisation are to be withdrawn in two stages, with the limit slated to go up to Rs 50,000 per week from February 20, and to go altogether from March 13.

The RBI’s Monetary Policy Committee (MPC) at its sixth and final policy review for the fiscal 2016-17, kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25 per cent.

The reverse repurchase rate automatically remained unchanged at 5.75 per cent.

“On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the MPC decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent,” RBI said in its monetary policy statement.

“Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.”

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.”

Noting that excluding food and fuel, inflation has been unyielding at 4.9 per cent since September, RBI said: “The Committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects.”

“It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path — the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission.”

The average level of retail inflation in 2015-16 was at 4.9 per cent.

The RBI noted that global trade remains subdued due to an increasing tendency towards protectionist policies and heightened political tensions.

More importantly, citing the surge in bank deposits post-demonetisation as a factor in holding its rates, the RBI said the transmission of policy rates by banks would depend on how soon three problems — of banks’ non-performing assets (NPAs), recapitalisation of the lenders and re-calibration of the small saving interest rates — are resolved.

More importantly, the apex bank said it was changing its policy stance from “accommodative” to “neutral”.

Addressing reporters here following the policy review, RBI Gobernor Urjit Patel said the decision to hold rates was taken in context of the “highly uncertain conditions” created by the impact of demonetisation.

“There is a shift in the stance of monetary policy from accommodative to neutral that would allow room to manoeuvre in either direction,” Patel said.

“I think this (change of stance) is mainly driven by a concern about global inflation which is picking up on fuel and metal side. This could also be a risk coupled with the strengthening of dollar and it could feed into significant inflation for our economy,” RBI Deputy Governor Viral Acharya said.

The central bank also lowered the country’s gross value added (GVA) growth projection for 2016-17 to 6.9 per cent, from its earlier projected 7.1 percent

However, the RBI projected a 7.4 per cent GVA growth for 2017-18 on the back of higher capital expenditure earmarked in the Union Budget for boosting the rural economy and affordable housing sectors.

Investors showed their disappointment over the RBI decision to maintain status quo on its key lending rates. The barometer 30-scrip sensitive index (Sensex) of the BSE, which opened at 28,386.08 points, closed at 28,289.92 points — down 45.24 points or 0.16 per cent, from the previous close at 28,335.16 points.

Expressing disappointment over RBI holding rates, industry chamber Assocham said it was worrisome that RBI is “putting an end to the accommodative stance in the wake of the impact of demonetisation.”

“The RBI, in a way, has put the ball in the court of the government for softening of the interest rates which, it said, would depend on how soon the problems of the bank NPAs, recapitalization of the lenders and re-caliberating of the small saving, are resolved,” an Assocham statement said.

“Given the general environment of uncertainty both domestically and abroad, the RBI decision to maintain status quo was on expected lines. Regarding the change of stance from accommodative to neutral, it may be a little early to shift the stance,” State Bank of India Chairman Arundhati Bhattacharya said in a statement here.

“We do take cognisance of the fact that Banks have moved forward to revise down their lending rates over the last month. However, a more sustained effort would be required to bring a turnaround in domestic private capex cycle” said Pankaj Patel, President of the industry chamber FICCI.

Commenting on RBI policy review, Economic Affairs Secretary Shaktikanta Das told reporters in New Delhi that after the exchange of old notes, banks have reduced their lending rates “considerably”.

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