RBI repo rate: No cut, central bank cites rising rural wages, fallout from farm loan waivers

By: | Updated: June 8, 2017 8:07 AM

Says rising rural wages, policy intervention could reverse trajectory; points to fallout from farm loan waivers

RBI, urjit patel,  liquidity ratio, Viral Acharya, farm loan waivers,  NS Vishwanathan, inflation, economy, CSO data, liquidity ratioDK Joshi, chief economist at Crisil, said that given the likely undershooting of inflation, the neutral stance has a de facto softening bias. (Reuters)

Although it sharply lowered the inflation projections for 2017-18 by about 100-150 basis points, the Reserve Bank of India (RBI) on Wednesday refrained from cutting the key policy rate. As such, the repo rate remains unchanged at 6.25% while the statutory liquidity ratio was trimmed by 50 basis points to 20%. While retaining its neutral stance, the RBI said at this point it was difficult to disentangle the impact of the various factors influencing prices and to gauge whether inflation would stay benign or not. “As the year progresses, underlying inflation pressures, especially input costs, wages and imported inflation, will have to be closely and continuously monitored,” the RBI said in a statement. The central bank now pegs headline inflation at 2-3.5% in the first half of the year and at 3.5-4.5% in the second. “We have a combination of a big surprise in inflation and in the CSO data on growth and are waiting to get a finer grip of what’s happening in the economy,” deputy governor Viral Acharya said. The central bank believes targeted intervention in specific sectors would probably help the economy better at this point. The RBI has dropped its gross value added growth forecast for 2017-18 to 7.3% from 7.4%. The bond markets nevertheless cheered the lower inflation forecast with treasurers reassured by the softer tone and hopeful of a rate cut in August. The yield on the benchmark bond fell 7 basis points at close of trade to 6.57%, the lowest in four months.

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DK Joshi, chief economist at Crisil, said that given the likely undershooting of inflation, the neutral stance has a de facto softening bias. “We now assume increased chances of a 25 basis points repo rate cut, most likely in the August MPC review meeting,” Joshi said. RBI governor Urjit Patel warned that large farm loan waivers announced by state governments could lead to fiscal slippages and higher inflation.

“There is the likelihood of this going down the slippery path. Past episodes shown when there are slippages they do permeate through to inflation,” Patel said. Among the factors that could reverse the inflation trajectory, the central bank mentioned rising rural wages, any policy intervention to stem the fall in the prices of pulses, the wearing off of the transitory effects of demonetisation and a revival in demand from remonetisation.  Meanwhile, the central bank said it was working together with stakeholders to resolve the problem of stressed assets and that it had a clear strategy in place. A revised set of restructuring guidelines was in the works, RBI deputy governor NS Vishwanathan said, adding that some action could be expected soon.

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