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Sixth bi-monthly monetary policy review: Rates on hold, RBI to wait for Budget, more data

Policy broadly in line with market expectation, says FinMin; Investors remain jittery with BSE Sensex falling by 286 points to 24,539.

By: ENS Economic Bureau | Mumbai |
February 3, 2016 3:15:27 am
RBI Governor Raghuram Rajan with Deputy Governor H R Khan at a press conference at the central bank’s headquarters in Mumbai on Tuesday. (Source: Ganesh Shirsekar) RBI Governor Raghuram Rajan with Deputy Governor H R Khan at a press conference at the central bank’s headquarters in Mumbai on Tuesday. (Source: Ganesh Shirsekar)

The Reserve Bank of India on Tuesday kept policy rates unchanged awaiting further data on inflation and on the government’s fiscal stance in the upcoming Budget, while indicating that its accommodative policy stance will continue.

RBI Governor Raghuram Rajan appears to have put the onus on the Central government, saying that “Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent” by the end of 2016-17.

“The RBI continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation,” Rajan said while announcing the sixth bi-monthly monetary policy statement. The main policy instrument — the repo rate, which is the rate at which the RBI lends funds to banks — will remain unchanged at 6.75 per cent and cash reserve ratio — the portion of deposits to be kept with the RBI, at 4 per cent. The central bank had cut repo rate by 125 basis points in 2015 but banks are yet to fully pass on the benefit to borrowers.

Rajan hinted that the RBI will have a close look at the fiscal path to be chartered by the Central government, especially the fiscal deficit targets, borrowing plan and structural reforms, including steps to boost training and skilling and services sector inflation in areas such as healthcare and education.

With unfavourable base effects on the ebb and moderate prices of fruits and vegetables and crude oil, the January 2016 target of 6 per cent should be met, the RBI said. Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and be around 5 per cent by the end of fiscal 2016-17, Rajan said. However, there could be cloud on achieving the inflation target as the implementation of the 7th Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years.

Based on an assessment of the balance of risks, the RBI has projected a higher growth rate of 7.6 per cent for 2016-17 as against 7.4 per cent in 2015-16.

Meanwhile, the finance ministry on Tuesday said the monetary policy was broadly in line with market expectations and the government will unveil fiscal consolidation roadmap in the Budget 2016-17. “We will have to wait and watch the trajectory of inflation going forward,” Economic Affairs Secretary Shaktikanta Das was quoted by PTI as saying. India Inc batted for rate reduction. “The slip-up in industrial growth as reported in the November numbers indicates persistence of underlying weakness and the fact that we are still away from a firm turnaround … Bringing down interest rates is imperative to propel investments,” said Harshavardhan Neotia, president, Ficci.

To say there’s huge liquidity crunch is not true: Rajan

Reserve Bank Governor Raghuram Rajan, on Tuesday, refuted reports that the market was facing a liquidity shortage and argued that the amount of lending that the RBI was doing in the market has increased to offset the shortages. Excerpts:

On liquidity shortage

Our measure of whether there is enough liquidity is to see whether the rates in the call money market are broadly in line with the policy rate. I think the evidence is they are. Certainly because of a variety of reasons that we pointed out in the statement, the amount of lending we are doing in the market has increased to offset the shortages for a variety of reasons. We are supplying that liquidity. To argue that there’s enormous liquidity shortage at this point in the market, I think, is not consistent with the facts. However we also take a view on the difference between short-term liquidity needs because of seasonal build-ups like government balances, and long-term liquidity needs which come from the need to expand the RBI’s balance sheet at a steady pace. We are looking into what this means what instruments to use… for short-term liquidity needs we use short-term liquidity instruments and for long-term liquidity needs we use open market operations and currency reserves. We will look at the emerging liquidity needs and use all instruments to manage this.

On govt’s high cash balances

I can’t say there is any immediate effect because we do tend to offset any increase in government balances through liquidity measures in the market. In that sense short-term fluctuations we expect and we take measures to offset this. Auctioning government balances is one of them. We also lend money into the market. We do also think about the long-term liquidity needs of the economy are. The liquidity management has been adequate.

On stalled projects

If you look at data, it looks like it was coming down steadily … in the last couple of quarters it seems to have started picking up once again. That’s a source of concern because the steady improvement that was seen seems to be just moderating. The government is taking measures to reduce the stalled projects.

Asset sales by banks

We had a discussion with ARCs and NBFCs on what role they could play in this process. We never tell banks they must sell such and such assets. We need to create capacities to absorb asset sales when they happen.

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