RBI monetary policy: Here’s why Raghuraman Rajan ensured money doesn’t get any cheaper

By: |
Mumbai | June 08, 2016 7:47 AM

Economists believe room for a 25-bps drop in repo but differ on timing

Raghuram Rajan, RBIThe RBI has cut the repo rate by 150 basis points since January 2015.(Reuters Photo)

The Reserve Bank of India (RBI) on Tuesday red-flagged potential inflationary pressures in the environment while leaving the key repo rate unchanged at 6.5%, indicating money isn’t about to become cheaper just yet.

At the same time, the central bank intends to review the marginal cost-based lending rate (MCLR), aimed at helping banks drop loan rates faster, for any “rigidities” that might be hampering transmission.

Observing transmission was “work in progress”, governor Raghuram Rajan said the reason banks were in no hurry to drop rates was probably the paucity in demand for credit demand. “We’re hoping the recent build-up in deposits would prompt lenders to put the money to work,” Rajan told the media. The central bank believes transmission into lower rates is inadequate and “critical” for growth.

It has nevertheless left its projection of GVA (gross value added) unchanged at 7.6% for 2016-17, saying the risks are “evenly balanced”.

It believes business confidence will be “restrained” to some extent due to an unfriendly global environment.

The governor reassured the markets saying the central bank’s stance remained “accommodative” and that it would cut rates if there was room to do so. He, however, cautioned inflation had been sharper than anticipated. “There are potential inflationary pressures though the monsoon could be a source of disinflationary pressures,” Rajan said.

Economists believe there’s room for a drop in the repo rate of 25 basis points though they differ on the timing.

Samiran Chakraborty, economist at Citigroup, believes the downside risks on inflation may outweigh the upside risks, opening up the scope for a residual 25 bps rate cut. “However, we expect the RBI to remain in a wait-and-watch mode in H1 on account of adverse base effects and monsoon uncertainty,” Chakraborty wrote after the policy announcement.

Pranjul Bhandari, economist at HSBC, expects a final 25 bps rate cut in August if early showers over June and July are sufficient. “Oil prices may have risen sharply, but food matters more for CPI given the higher weight in the basket — 45% food versus 15% fuel,” Bhandari pointed out.

The RBI has cut the repo rate by 150 basis points since January 2015. However, base rates — to which most loans are linked — have come off by just 70 basis points. The lowest base rate in the system today is 9.3% while the lowest MCLR is 8.9%. The governor believes benign liquidity conditions should help monetary transmission. Over April and May, the RBI has infused liquidity to the tune of `70,000 crore via open market operations purchases alone.

Speaking on the anticipated redemption of FCNR(B) deposits towards the end of the year, Rajan said there were some concerns of a dollar shortage. “We will intervene to contain extreme volatility but no one should take it for granted we will bail them out,” the governor asserted. The central bank believes the leveraged portions of those deposits will not be renewed and consequently, estimates the outflows at close to $20 billion. Rajan added that the RBI was committed to supplying rupee liquidity if needed.


Do you know What is India expected to grow 10 pc during current fiscal: NCAER Director General Poonam Gupt,FinMin releases Rs 9,871 cr grant to 17 state, Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1UK hopes to soon complete FTA talks with India
2WTO Agreement on Agriculture tilted against developing countries: Goyal
3World Bank Group decision to discontinue Doing Business report exposes China’s fraud: Govt source