While India Inc and the government were expecting a rate cut in the wake of a decline in growth rate and inflation, the Reserve Bank of India on Wednesday chose to keep the interest rates unchanged stating that “premature action at this stage risks disruptive policy reversals later and the loss of credibility”.
While five members of the six-member Monetary Policy Committee (MPC) voted in favour of keeping the Repo rate steady at 6.25 per cent, Ravindra H Dholakia was against the majority proposal. “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. Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data,” the MPC said in its second bi-monthly monetary policy statement for 2017-18.
MPC noted that inflation has fallen below 4 per cent only since November 2016 and maintained that it “remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis keeping in mind the output gap”. The RBI reduced the statutory liquidity ratio (SLR) by 50 basis points to 20 per cent of deposits and tightened the issue norms for overseas rupee-denominated bonds.
On Monday, Finance Minister Arun Jaitley had made a case for cut in interest rates, saying inflation has been under control for long and is likely to remain so on the back of good monsoon while there is no likelihood of a spike in oil prices. “Growth and investment need to improve. These are indicators which are available. Any finance minister under these circumstances would like a rate cut, the private sector would like a rate cut. But then when you entrusted it with the MPC, I would rather wait for their decision,” he had said.
GVA (gross value added) growth slowed down to a mere 6.6 per cent in FY17, a whopping 130 bps lower than the 7.9 per cent growth registered in the previous year. The year-on-year CPI inflation eased sharply to a series-low 3.0 per cent in April 2017, led by food inflation.
The MPC said incoming data suggested that the transitory effects of demonetisation have lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits and vegetables, pulses and cereals. At the same time, however, the CSO’s latest releases on national income accounts and industrial production attest to the effects of demonetisation on the broader economy being sector specific and transient, as well as to the noteworthy resilience of private consumption.
“At this stage, it is difficult to isolate these factors or to judge the strength of their persistence. As the year progresses, underlying inflation pressures, especially input costs, wages and imported inflation, will have to be closely and continuously monitored,” MPC said in its resolution.
“The RBI will continue to work in partnership with the government to address the stress in banks’ balance sheets. Better alignment of administered interest rates on small savings with market rates and stepped-up recapitalisation of banks to facilitate adequate flow of credit to productive sectors are important steps to follow through,” RBI Governor Urjit Patel said.
Meanwhile, the RBI lowered the growth estimate in line with the CSO figures. “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,” Patel said.
On bad loan resolution, RBI Deputy Governor N S Vishwanathan said, “overall, the RBI has a strategy to deal with the resolution of large assets and we are working in a calibrated manner and we hope to see some actions coming soon.” The RBI has decided to focus on a few large stressed accounts under the framework and accordingly a set of accounts has been identified. “The decision on specific accounts out of these to be referred for Insolvency and Bankruptcy Code (IBC) or to be restructured will be taken under the guidance of the internal advisory committee,” he said.