RBI Maintains Status Quo But Leaves The Door Open For A Rate Cut
The central bank maintained a neutral stance on monetary policy.
- RBI leaves repo rate unchanged at 6.25 percent
- RBI leaves reverse repo rate unchanged at 6 percent
- RBI maintains neutral stance on policy
- Statutory liquidity ratio reduced by 50 basis points to 20 percent with effect from June 24
- RBI reduces GVA growth projection by 10 basis points to 7.3 percent
- RBI expects headline inflation in the range of 2.0-3.5 percent in the first half of the year and 3.5-4.5 percent in the second half
India’s monetary policy committee (MPC) on Wednesday voted to leave the benchmark interest rate unchanged, even though the decision was not unanimous. Five of the six MPC members voted in favour of the decision. Ravindra Dholakia, an external member, was not in favour of the decision. While keeping rates unchanged, the Reserve Bank of India (RBI) slashed its inflation projection for the current year, opening up room for a rate cut in the coming months.
Following the monetary policy review, the repo rate, the rate at which the central bank lends to banks, stands unchanged at 6.25 percent. The reverse repo rate, the rate at which the the central bank absorbs funds from lenders, also remains unchanged at 6 percent.
In line with its stated stance of reducing the statutory liquidity ratio, or the proportion of government securities that banks are mandated to hold, the RBI reduced it to 20 percent from 20.5 percent earlier.
The RBI also maintained a neutral stance on monetary policy and said that premature action could lead to “disruptive policy reversals later” and damage the credibility of monetary policy.
MPC was cognizant of several risks in the medium-term. Rising rural wages, robust consumption demand, global risks in terms of imported inflation kept policy stance at ‘neutral’.Urjit Patel, RBI Governor
The MPC, in its statement, noted the recent fall in inflation but added that it remains focused on the commitment to keeping headline inflation close to 4 percent on a durable basis. “Premature action at this stage risks disruptive policy reversals later and the loss of credibility. Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data,” said the statement.
Speaking at the press conference, RBI Deputy Governor Viral Acharya said the central bank will monitor inflation data as well as other economic indicators and “act for a broader accommodation through the interest rate policy” if the data so warrants.
Last month, headline inflation print and revised growth estimates have raised difficult policy questions. We will watch carefully in next few months the data on inflation as well as the indicators of real economic activity..and if the data so warrants, act for a broader accommodation through the interest rate policy.Viral Acharya, Deputy Governor, RBI
The clamour for a rate cut had grown stronger after retail inflation fell to 2.99 percent in April. Economists predict that inflation will remain well below the Reserve Bank of India’s (RBI) medium term target of 4 percent for the next few months.
The RBI cut its forecast for headline inflation to 2.0-3.5 percent in the first half of the year and 3.5-4.5 percent in the second half. The central bank had earlier forecast that consumer price inflation will average between 4-4.5 percent in the first half of fiscal 2018 and 4.5-5 percent in the second half of the year.
Slower than expected growth data added to the calls for a rate cut. Data released by the Central Statistical Organisation (CSO) showed that gross value added growth slowed sharply to 5.6 percent in fourth quarter of fiscal 2017, from 6.7 percent in the third quarter. The RBI on Wednesday reduced the GVA growth projection by 10 basis points to 7.3 percent.
The cut in inflation projections from the RBI and softer commentary on inflation led to a fall in bond yields. The yield on the benchmark 6.79 percent bonds due 2027 bonds fell five basis points to 6.59 percent after the policy announcement. The rupee rose 0.2 percent to 66.3250 against the dollar.
“We currently expect the RBI to leave rates unchanged through March 2018, which would then be followed by a cumulative 50 basis points of rate hikes starting April 2018. Our forecasts are currently under review,” said Nomura Global Research in a report released soon after the policy.
Kotak Economic Research also held on to its call that the RBI will keep rates on hold for now. “We believe that a case for a rate cut will be strengthened only with a downside surprise to RBI’s H2FY18 inflation estimates,” said their report.
Jayesh Mehta, treasurer of Bank of America-Merrill Lynch, reiterated his call for a rate cut in August.
I am hopeful of a rate cut in August. Markets, from the other extreme of rate hike, is now going in the other direction of (expecting a) rate cut.Jayesh Mehta, Treasurer, Bank of America-Merrill Lynch
Other Highlights
Big Push On Housing
- RBI rationalises risk weights and loan-to-value ratios for housing loans
- Standard asset provision for individual housing loans set at 0.25 percent
Tightening Norms For Masala Bonds
- Minimum maturity for masala bonds up to $50 million set at 3 years
- Minimum maturity for masala bonds more than $ 50 million set at 5 years
- All in cost ceiling for masala bonds at 300 basis points above government bonds of corresponding maturity
- All masala bond applications to be examined by RBI’s foreign exchange department
