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RBI sticks to its guns! Keeps policy rates on hold, maintains accommodative stance

RBI sticks to its guns! Keeps policy rates on hold, maintains accommodative stance

Reserve Bank of India’s Governor, Raghuram Rajan, in what “speculatively” could be his last monetary policy, upped the guard and adopted status quo stance on policy action, along expected lines.

Reserve Bank of India’s Governor, Raghuram Rajan, in what “speculatively” could be his last monetary policy, upped the guard and adopted status quo stance on policy action, along expected lines. The policy repo rate under the liquidity adjustment facility (LAF) remained unchanged at 6.5%; consequently, the reverse repo rate under LAF remained at 6%. Meanwhile, the cash reserve ratio (CRR) of scheduled banks was maintained at 4% of net demand and time liabilities (NDTL).

However, in an attempt to assuage concerns, RBI reiterated that its broader monetary policy stance remained “accommodative”. This comes amid host of uncertainties such as sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as reversal in commodity prices.


Key highlights of the second bi-monthly monetary policy:

Inflation target retained; but with upward bias:

The central bank retained the inflation target of 5% for March 2017, but with an “upward bias”.  It has factored in the firming international commodity prices, particularly crude oil. The implementation of the 7th Central Pay Commission awards will be factored into projections once there is more clarity on implementation. Upturn in inflation expectations of households and corporates and stickiness in core inflation presents upside risks.

Street was taken by surprise when retail inflation measured by the consumer price index (CPI) rose more sharply than expected in April due to a more-than-seasonal jump in food prices. Within the food group, inflation in vegetables, fruits, sugar, meat, and fish rose sizeably from their prints in the previous month. Inflation in pulses remained elevated. The recent decline in pulse prices has reversed, leading to a sharp increase in April.
Considering the sharp uptick in April inflation reading, the monetary policy statement cautioned that much would now hinge on a favourable monsoon and a reasonable spatial and temporal distribution of rainfall along with various supply management measures and introduction of the electronic national agriculture market (e-NAM) trading portal. 

FY17 growth projection at 7.6% retained; private investment worrisome:
Quashing hopes for upward revision in FY17 GDP growth forecast, India’s central bank retained the growth projection at 7.6% even as there was sharp uptick in last quarter’s GDP readings. However, the governor struck a cautious note, underscoring that higher public sector capital expenditure led by roads and railways could cramp up private investment. Financial stress could affect the appetite for fresh private investment.
Much to the investors delight, GDP grew from 7.2% in the December 2015 quarter to 7.9% in the March 2016 quarter, driven by recovery in agricultural output, increase in mining and electricity production. GDP growth for FY16 stood at 7.6%, a considerable improvement from 7.2% during the previous financial year.

NPA issue - Clean-up mechanism being worked out?

Following the central bank’s directive, public sector banks have been disclosing higher non-performing assets to clean up their balance sheets. However, various discussions have thrown up the plight of PSU banks. The worst might well be behind for the banks. The dictate on recognition of stressed assets by RBI post a thorough system wide asset quality review as well as some element of proactive cleansing has meant that there was precious little to cheer for PSU banks during the year.
Addressing this issue, RBI in its opening remarks at the press conference said that the central bank was working along with the government to discuss the next course of action in the clean-up mechanism. The Governor also revealed that various discussions were underway in regards to investing various funds in stressed situation. However, he categorically expressed the bank’s intent on not going back to the days of forbearance or reverse the move towards transparent bank balance sheets.

To weather a Brexit storm, if the vote is in the affirmative

In the face of global uncertainties, RBI’s Governor comments on Brexit drama were much watched out for. Acknowledging the issue, Raghuram Rajan said that though this remained a source of volatility for financial markets, the central bank was in a position to weather the same.

Some recent polls suggest that the UK might be voting in favour of a British exit from the EU. Referendum on the country's membership in the European Union is expected to take place later this month on June 23rd. Nevertheless, it has to be said in the same breath that the margin between the two options, to "remain" a member of the EU or to "leave" it, remains narrow.
Million dollar question! Will Raghuram Rajan’s tenure be extended?

Interestingly, the Governor maintained the air of suspense over the questions regarding his tenure and mockingly said that it was cruel of him to spoil the fun that media was having over discussions related to his tenure. He further added that his tenure would be discussed by the RBI with the Government at an appropriate time.

If not extended, this would be the shortest stint of any Indian central bank governor since 1992.  Raghuram Rajan is a highly regarded central banker globally, with his resume including time as the chief economist at the International Monetary Fund.

RBI’s second bi-monthly monetary policy, much on expected lines was a non-event. However, the accommodative stance on future policy rates along with forecast of normal monsoon was the key positives. However, cat was set among the pigeons after the inflation target of 5% for FY 17 was retained, but with upward bias. Nevertheless, the Governor exhibited confidence in tiding over Brexit issue. Importantly, the governor also emphasized on the need of transmission of past policy rate reductions to lending rates of banks and timely capital infusions into constrained public sector banks.


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