1. After Diwali fireworks, a quiet Christmas for RBI

After Diwali fireworks, a quiet Christmas for RBI

RBI Guv Raghuram Rajan holds policy rate while flagging inflation as a challenge

By: | Mumbai | Updated: December 2, 2015 10:53 AM
RBI governor Raghuram Rajan said the central bank “will use the space for further accommodation when available”. (PTI)

RBI governor Raghuram Rajan said the central bank “will use the space for further accommodation when available”. (PTI)

A status quo by the Reserve Bank of India (RBI) on the key repo rate on Tuesday — on the grounds that rising retail inflation warranted some vigilance — has left little room for banks to cut their loan rates immediately. However, with the new formula for calculating for base rates to be out later this week, borrowers can hope for lower interest rates soon.

The central bank left the repo unchanged at 6.76% as widely expected, following the 50-basis-point cut in September, making no alterations in the reserve or cash requirements.

RBI governor Raghuram Rajan said the central bank “will use the space for further accommodation when available”.

The rise in retail inflation for the third consecutive month in October, the governor observed, bore watching. The RBI has revised its forecast for inflation to 5% by March 2017. However, it retained the 7.4% GDP forecast with Rajan saying the economy was “well and truly” in the midst of a recovery though there were areas of weakness.

Economists believe the pause on rates could be a prolonged one. “We think the bar for further easing is high given the challenge of lowering underlying inflation from 5.5% now to 5% in early 2017, a time when growth is likely to be ticking up. For now, the RBI may be best off focusing on transmission issues,” wrote Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets.

At a press conference, Rajan said the new method, based on the marginal cost of funds, would allow banks to act faster. “We’re focusing on transmission because less than half the cumulative 125 basis points reduction in policy rates has been passed by banks,” Rajan said. The intent, he said, was to enable banks to price incremental loans based on the marginal cost. Currently, banks set the floor lending rate or the base rate according to the average cost of funds.

Rajan said that the government was “examining” linking the interest rate on small savings to market interest rates, a move that will aid transmission. Thus far, banks have been hesitant to reduce interest rates on deposits beyond a point apprehending money will move away to small savings schemes. The clean-up in banks’ balance sheets would also free up room for fresh lending, the RBI believes.

  1. M
    MADHUKAR DAYAL
    Dec 3, 2015 at 9:44 am
    Cheers, Rajan! Now a tighter rope walk! Raghuram has done a wonderful job, so far, by hardly changing anything much (the repo rate and CRR), but ahead lies a rough in the water raft ride! The GoI missed making an appropriate (or any) provision for the impact of 7CPC in the current fiscal at the time of Budget FY1516 (see ), even though, if timely implemented, 25% of the fiscal would have seen revised pays for over 4.4 million central Government employees and 5.5 million pensioners (see 08_16_archive). The estimated impact of 7CPC in the first fiscal is expected to be upwards of Rs 1.6 lakh crore by conservative estimates, and so, if implemented in time, about Rs 40,000 crore in FY1516 itself, enough to shake inflation in the markets, and then some! A substantial part of it, of course, will dissolve into TDS. This extra liquidity is capable of causing more than a minor hiccup, especially due to the spiral inflationary effect of domestic spending. Are the markets capable of absorbing this flow of sudden money without any impact on inflation? In my opinion, hardly. Can we do something to curtail the impact? Not that the boost to economy likely to be brought by increased household capability to spend is undesirable, however, there are several simple steps that Raghuram and the GoI should contemplate immediately to enhance the individual and household savings, even though propensity to save in India is the highest in the World. Some suggested simple steps that the GoI can take and should announce immediately (I hope GoI starts contemplating now, if not already in it) are: (i) Deduct one time contributions to PPF, EPFO etc. at source itself. Less flow into hands will lead to less household spending and lesser pressure on inflation. This can also be done in part mandatory and part voluntary fashion. (ii) Considering a perpetual raise in the percentage of ry deducted towards PPF / EPFO. This too presents a good case for discussion now, voluntarily, if not mandatory. (ii) Consider raising the annual upper limit for individual tax payers' tax saving deposits in various tax saving instruments (aren't all of them already too complicated for the 'common man' and deserve simplification, such as, consideration of investments in all schemes equally with only a single upper individual limit, without divisions into sections 80C, 80CCC, 80CCD, 80D, 80U...poof?). From the current Rs 1.5 lakh pa limit, a major jump, such as to Rs 2.5 lakh pa, is desirable from current fiscal itself. (iii) Life and health insurance (if necessary, up to a limit) premiums present a strong case to be brought into the band eligible for direct deduction from ry. Experts frequently opine that the Indian households have a very low appee for all insurances. (iv) Launch a tax free GoI Infrastructure long term Bond sold through Government banks. Advise the state Governments to do so too (if they do not themselves see and seek the opportunity!). These funds would help fund the needed rapid growth in roads, bridges, small city airports, Railways, green energy generation, and a host of other infrastructure development across the country. The state Governments may be allowed to bid in an auction for grants from the central Government for these funds for improvements in infrastructure in their states providing motivation and pressure for improved handling of Government owned or partnered infrastructure projects. (v) Direct the Government banks (and private banks, too, if possible) to waive any loan pre-payment penalties (at least for a period of next few months) for the benefit of saving savvy individuals and households. The additional savings (or pay offs of past expenses) will result in a more robust household economy, availability of funds with banks and other financial Insutions for appropriate further investments, and also for GoI to support its capital intensive growth drives. Will Rajan be able to convince the Government to take such steps or will he have to increase (hic!) the repo rate to control inflation? Keep your balance, Raghuram!
    Reply
    1. M
      MADHUKAR DAYAL
      Dec 3, 2015 at 9:58 am
      Cheers, Rajan! Now a tighter rope walk! Raghuram has done a wonderful job, so far, by hardly changing anything much (the repo rate and CRR), but ahead lies a rough in the water raft ride! The GoI missed making an appropriate (or any) provision for the impact of 7CPC in the current fiscal at the time of Budget FY1516 (see ), even though, if timely implemented, 25% of the fiscal would have seen revised pays for over 4.4 million central Government employees and 5.5 million pensioners (see 08_16_archive). The estimated impact of 7CPC in the first fiscal is expected to be upwards of Rs 1.6 lakh crore by conservative estimates, and so, if implemented in time, about Rs 40,000 crore in FY1516 itself, enough to shake inflation in the markets, and then some! A substantial part of it, of course, will dissolve into TDS. This extra liquidity is capable of causing more than a minor hiccup, especially due to the spiral inflationary effect of domestic spending. Are the markets capable of absorbing this flow of sudden money without any impact on inflation? In my opinion, hardly. Can we do something to curtail the impact? Not that the boost to economy likely to be brought by increased household capability to spend is undesirable, however, there are several simple steps that Raghuram and the GoI should contemplate immediately to enhance the individual and household savings, even though propensity to save in India is the highest in the World. Some suggested simple steps that the GoI can take and should announce immediately (I hope GoI starts contemplating now, if not already in it) are: (i) Deduct one time contributions to PPF, EPFO etc. at source itself. Less flow into hands will lead to less household spending and lesser pressure on inflation. This can also be done in part mandatory and part voluntary fashion. (ii) Considering a perpetual raise in the percentage of ry deducted towards PPF / EPFO. This too presents a good case for discussion now, voluntarily, if not mandatory. (ii) Consider raising the annual upper limit for individual tax payers' tax saving deposits in various tax saving instruments (aren't all of them already too complicated for the 'common man' and deserve simplification, such as, consideration of investments in all schemes equally with only a single upper individual limit, without divisions into sections 80C, 80CCC, 80CCD, 80D, 80U...poof?). From the current Rs 1.5 lakh pa limit, a major jump, such as to Rs 2.5 lakh pa, is desirable from current fiscal itself. (iii) Life and health insurance (if necessary, up to a limit) premiums present a strong case to be brought into the band eligible for direct deduction from ry. Experts frequently opine that the Indian households have a very low appee for all insurances. (iv) Launch a tax free GoI Infrastructure long term Bond sold through Government banks. Advise the state Governments to do so too (if they do not themselves see and seek the opportunity!). These funds would help fund the needed rapid growth in roads, bridges, small city airports, Railways, green energy generation, and a host of other infrastructure development across the country. The state Governments may be allowed to bid in an auction for grants from the central Government for these funds for improvements in infrastructure in their states providing motivation and pressure for improved handling of Government owned or partnered infrastructure projects. (v) Direct the Government banks (and private banks, too, if possible) to waive any loan pre-payment penalties (at least for a period of next few months) for the benefit of saving savvy individuals and households. The additional savings (or pay offs of past expenses) will result in a more robust household economy, availability of funds with banks and other financial Insutions for appropriate further investments, and also for GoI to support its capital intensive growth drives. Will Rajan be able to convince the Government to take such steps or will he have to increase (hic!) the repo rate to control inflation? Keep your balance, Raghuram!
      Reply

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