RBI keeps repo rate steady at 6.25%; reverse repo and bank rate stand at 5.75% and 6.75%
Contrary to expectations of a 25 basis point (bps) rate cut, the Reserve Bank of India (RBI) kept repo rate steady at 6.25% in its sixth bi-monthly monetary policy review on Wednesday. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) remains unchanged at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.
“A cut of 25 bps was widely expected and would have lifted the sentiment. At this juncture, post long stint of shrinking economy and then demonetisation, people were postponing the demand. This rate cut was necessary from the perspective of bringing that demand back in the system,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.
"Given that the main guiding factors of last policy review including global uncertainty, rising oil prices and a sticky core inflation largely remained in play since, the hold on rates is in line with broader guidance provided by RBI then," said Mahendra Kumar Jajoo, Head - Fixed income - Mirae Asset Global Investments (India).
"The RBI also indicated its commitment to ensure an efficient and appropriate liquidity management, suggesting the short term rates may inch slightly higher and align more closely with repo rate in coming months. After the initial knee-jerk reaction, we expect bond yields to stabilize and take clues from developments in global markets in near term," Jajoo adds.
Here are five key takeaways from the RBI’s monetary policy review:
Gross Value Added (GVA) projection cut to 6.9% for FY18: The RBI has lowered the FY17 GVA projection to 6.9% from the existing 7.1%. For FY18, the central bank has projected the GVA at 7.4%, with risks evenly balanced around it.
Growth, the RBI believes, can recover sharply in FY18. This, the central bank believes can be triggered by revival in discretionary demand held back by demonetisation; pick-up in economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector; and pick-up in both consumption and investment demand.
Inflation targeting: In December, the RBI had projected the headline inflation at 5% in Q4 of 2016-17. For the first half of the next financial year, the RBI now projects inflation to be in the range of 4% to 4.5%, and in the range of 4.5% to 5% in the second half (H2FY18).
“Rising crude oil prices, volatility in the exchange rate on account of global financial market developments and fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path remain as the key risks”, the RBI said.
Shift from ‘accommodative’ to 'neutral' stance: Given the domestic and global headwinds, the RBI has turned more hawkish as regards rates. The central bank, which till now, promised to remain ‘accommodative’ as regards key rates, has shifted its stance to ‘neutral’.
“The decision of the MPC is consistent with a ‘neutral’ stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by Q4 of 2016-17 and the medium-term target of 4% within a band of plus/minus 2%, while supporting growth,” the RBI statement said.
Savings account cash withdrawal limits relaxed: While reviewing the monetary policy, the RBI also raised cash withdrawal limits for savings accounts from the existing Rs 24,000 to Rs 50,000 per week, staring February 28. “All cash limits will be removed from March 13, 2017,” the RBI said.
The central bank has already removed all withdrawal limits from current accounts on February 01. Limits on withdrawals via cheques and ATM machines were placed following the government’s demonetisation move on November 08, 2016.
Transmission of policy rates: The Monetary Policy Committee (MPC) believes that the environment for timely transmission of policy rates to banks’ lending rates can be considerably improved.
"This can happen if: (i) the banking sector’s non-performing assets (NPAs) are resolved more quickly and efficiently; (ii) recapitalisation of the banking sector is hastened; and, (iii) the formula for adjustments in the interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented," the RBI statement said.
Published on Business Standard
by Puneet Wadhwa | New Delhi