- MPC cuts repo rate by 25 basis points to 6 percent
- MPC maintains neutral policy stance
- Four members voted in favour of a 25-basis-point cut, one member voted for a 50 basis point cut and one voted for status quo
- No change in projection for current fiscal.
Projection of GVA growth in FY18 maintained at 7.3 percent
India’s monetary policy committee (MPC) on Wednesday voted to cut interest rates in response to a steeper-than-expected fall in inflation, and maintained a neutral policy stance. The decision was in line with a Bloomberg poll of economists, where a majority of respondents had forecast a 25-basis-point cut in rates.
Four members voted in favour of a 25-basis-point cut, one member voted for a 50 basis point cut, and one voted for status quo. Following the decision, the benchmark repo rate stands reduced to 6 percent from 6.25 percent earlier. Accordingly, the reverse repo rate has been pegged down to 5.75 percent.
‘Upside Inflation Risks Waned’
“Inflation trajectory is expected to rise from current lows, which is the main reason why we've been cautious enough to stick to a neutral stance. It was a right call to make by a majority of 4-2,” RBI Governor Urjit Patel said at the press conference while addressing a question by BloombergQuint.
Explaining its decision to cut rates, the central bank said some of the upside risks to inflation have either reduced or not materialised. “Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap,” the RBI’s policy statement said.
The central bank, however, decided to keep the policy stance neutral and to watch incoming data as “the trajectory of inflation in the baseline projection is expected to rise from current lows,” the statement added.
The MPC remains focused on its commitment to keeping headline inflation close to four percent on a durable basis...The MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient, or if a more durable disinflation is underway.RBI Policy Statement
Growth Projection
The RBI sharply revised downwards its growth projection to 6.7 percent for the current fiscal, from 7.3 percent earlier, due to lower kharif foodgrain production and disruptions arising from the implementation of GST.
The Goods and Services Tax has led to some uncertainty in the manufacturing sector, which is likely to delay revival of investment activity, it said.
"The projection of real GVA growth for 2017-18 has been revised down to 6.7 percent from the August 2017 projection of 7.3 per cent, with risks evenly balanced," RBI said in its fourth bi-monthly monetary policy statement of the current fiscal, leaving the key policy rate unchanged.
Projections Unchanged
The rate cut follows a drop in retail inflation to a level below the mandated range of 2-6 percent. Consumer price inflation fell to 1.54 percent in June, driven down by both food prices and softer core inflation. As per the monetary policy framework, the MPC has a mandate to maintain inflation in a band of four percent (+/- two percent). To be sure, the MPC does not need to react to one month’s inflation. However, a number of analysts have suggested that recent trends point to a structural decline in inflation.
The central bank made no change in its projections for the current fiscal. The forecast for gross value added growth for the fiscal 2017-18 has been maintained at 7.3 percent.
“There is an urgent need to invigorate private investment and remove bottlenecks. The RBI is working to resolve large corporate loans,” Patel said.
Growth indicators, which have weakened, added to calls for a rate cut. GDP growth for the March-ended quarter slipped to 6.1 percent. High frequency indicators like growth in core sector industries and the manufacturing purchasing managers’ index have are also pointing to some volatility in the economy.
Policy Rate Transmission
On new lending, the transmission in policy rate has been much stronger, especially in segments where there is high competition, Patel said. The part of the loan portfolio that is tied up on account of base rate the transmission has been slower, he added.
Given the prevailing liquidity scenario, there is scope for banks to reduce lending for those segments that have not gained the benefit.Urjit Patel, RBI Governor
Experience With MCLR Not ‘Entirely Satisfactory’: Viral Acharya
The experience with marginal cost of funds based lending rates has not been “entirely satisfactory,” according to Acharya. The RBI has constituted a study group to determine whether bank lending rate can be linked to market determined benchmarks, he told reporters at the policy press conference. The report will be submitted by September.
‘Watching Liquidity Conditions’
The RBI will continue to watch the level of currency in circulation and is mopping up liquidity through open market operations at a gradual pace, Acharya said.
We were clearly remonetising, and we had to watch and identify when the system was reaching stable liquidity. We had to give ourselves some time to know whether the system was getting the currency that it required.Viral Acharya, Deputy Governor, RBI
To improve transparency in credit markets, the RBI will put in place a task force to evaluate existing public and private infrastructure to create public credit registry, Acharya said.
The central bank will also introduce final guidelines for tripartite repo – is a type of repo transaction where a third entity called Tri-party Agent will act as an intermediary.
This agent will facilitate services like collateral selection, payment and settlement, custody and management. Introduction of tripartite repo was part of the recommendations of the HR Khan committee report on development of corporate bond market.
Market Reaction
The yield on government notes due May 2027 was little changed at 6.45 percent, after rising to as high as 6.47 percent in a knee-jerk reaction to the policy decision. The rupee strengthened by 0.56 percent to 63.72 against the dollar, still hovering near its two-year high.
(This article first appeared on BloombergQuint and has been republished with permission)
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