RBI’s monetary policy reflects new realities

RBI’s monetary policy reflects new realities

The decisions were announced at the central bank’s monetary policy committee’s (MPC) review meeting in Mumbai, chaired by RBI Governor Urjit Patel.

The Reserve Bank of India (RBI) may be fighting a desperate fight to regain its lost stature making a strong case for its independence in policy decisions and affirming its unwillingness to compromise the authority of the monetary policy committee (MPC) in deciding the rate course as it fights inflation. The Goods and Services Tax (GST), which the government plans to implement from July 1, is not expected to have any material impact on overall inflation, the central bank said.

The RBI maintained its key interest rate at 6.25 per cent for its fourth successive monetary policy review, dashing the government’s hopes of a reduction.

The BSE benchmark Sensex slipped into negative territory for a brief period after the RBI kept key policy rates unchanged today, but re-entered the green zone towards the fag-end of the session.

However, the RBI has cut the statutory liquidity ratio (SLR) by 50 basis points to 20 percent, with effect from June 24. With the Insolvency & Bankruptcy Code requiring time-bound decisions, the ordinance issued recently by the GoI and the discussions being held by RBI with stakeholders would hasten the process of resolution for banks’ stressed assets. Additionally, farm loan waivers, and the fiscal slippages that they may engender, were flagged as an inflationary risk. “At this juncture, the central bank signalling a move towards an accommodating stance would have helped uplift the sentiment”, he said. However, the RBI did not specify whether Mr. Dholakia was in favour of cutting or raising interest rates. However, the CPI inflation for April 2017 saw a sharp drop to 2.99% vs. 3.89% in March 2017; this seems to have resulted in the RBI projecting a lower inflation going ahead.

While suggesting that it remained fully flexible, it hinted that targeted growth enabling interventions were likely to be much better to address growth challenges in absence of efficient transmission of cuts due to overhang of bad loans on the books of banks.

In its report on Tuesday+, TOI had said that “an influential section within the government believes the RBI has been unsympathetic to its concern over persisting high interest rates and reluctant to take advantage of the room afforded by a comfortable fiscal situation and inflation”.

“The growth of real gross value added (GVA) for 2016-17 has been pegged at 6.6 percent, 0.1 percentage point lower than the second advance estimates released in February 2017”, the bank said.

“I do not think RBI will cut repo rate in the upcoming policy”. “The large cut in inflation projection by the RBI in the monetary policy is in consonance with ground realities and is likely to create room for rate cuts in the latter half of the year”.

“We continue to expect a prolonged pause with risks of a rate cut in August”, HSBC said.