1. Here’s why RBI kept policy rate unchanged with a ‘neutral’ stance in its monetary policy

Here’s why RBI kept policy rate unchanged with a ‘neutral’ stance in its monetary policy

Reserve Bank of India (RBI) has kept its stance 'neutral' in the second bi-monthly monetary policy review for the current fiscal announced today.

By: | Updated: June 7, 2017 4:23 PM
Reserve Bank of India (RBI) has kept its stance ‘neutral’ in the second bi-monthly monetary policy review for the current fiscal announced today. (Image: Reuters)

Reserve Bank of India (RBI) has kept its stance ‘neutral’ in the second bi-monthly monetary policy review for the current fiscal announced today. The decision of the Monetary Policy Committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

The central bank has based its current stance on the following factors:

Inflation

The central bank cited the uncertainties surrounding inflation for its stance.

“The abrupt and significant retreat of inflation in April from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the inflation projections. First, it needs to be assessed as to whether or not the unusually low momentum in the reading for April will endure. Second, the prices of pulses are clearly reeling under the impact of a supply glut caused by record output and imports,” RBI said is its Monetary Policy Report.

“Noting that inflation has fallen below 4 per cent only since November 2016, the MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis keeping in mind the output gap. The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place. 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.,” the report added.

Gross Value Added data

The banking regulator also cited lower GVA data as a reason for its decision.

“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 new data reveal that a slowdown in activity in both industry and services set in as early as Q1 of 2016-17 and became pronounced in Q4,” RBI’s report read.

Most experts had predicted that there would be no change in interest rates, adding that the central bank could adopt a wait and watch policy to see how inflation plays out as GST, the nation’s biggest tax reform, is implemented from 1 July.

Global financial services major BofAML had said in a report that it expects the RBI’s Monetary Policy Committee to maintain a dovish stance but may go for 25 basis points cut in the repo rate in August on the back a good monsoon. However, Japanese financial services firm Nomura in a report had said that it expects the RBI rates to stay on hold until March 2018.

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