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  1. RBI’s token 25 bps repo rate cut: Why Urjit Patel-led MPC did not gift Modi government a 50 bps cut

RBI’s token 25 bps repo rate cut: Why Urjit Patel-led MPC did not gift Modi government a 50 bps cut

RBI monetary policy review for August 2017: RBI and the MPC have cut repo rate by 25 basis points to 6%. With industrial activity subdued and inflation in the benign range, the Monetary Policy Committee saw it fit to cut repo rate.

By: | New Delhi | Published: August 2, 2017 3:15 PM
RBI monetary policy review for August 2017, RBI monetary policy review, rbi, rbi news, reserve bank of india, rbi latest news, Pradhan Mantri Awas Yojana, rbi repo rate, urjit patel, narendra modi, modi govt, modi, modi news, modi government Keeping a firm eye on its objective of keeping inflation in check, the MPC said that several factors contribute to the uncertainty surrounding baseline inflation trajectory. (Reuters)

RBI monetary policy review for August 2017: RBI and the MPC have cut repo rate by 25 basis points to 6%. With industrial activity subdued and inflation in the benign range, the Monetary Policy Committee saw it fit to cut repo rate. However, it shied away from giving economic growth a greater impetus by going in for a 50 basis points cut. Would 25 basis points cut be enough to spur economic growth? In the MPC’s own words, there is an immediate need to give private investment a big push.

The monetary policy review calls for an urgent need to “reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all.” “This hinges on speedier clearance of projects by the States. On their part, the Government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. These efforts should help restart credit flows to the productive sectors as demand revives,” the MPC says.

The industrial performance has weakened in April-May 2017, says MPC. “This mainly reflected a broad-based loss of speed in manufacturing,” it says MPC, adding that the “weakness in the capex cycle was also evident in the number of new investment announcements falling to a 12-year low in Q1, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.”

“Business sentiment polled in the manufacturing sector reflects expectations of moderation of activity in Q2 of 2017-18 from the preceding quarter. Moreover, high levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment,” adds MPC.

So, why not a 50 basis points cut?

That’s because the MPC is still keeping its eye firmly on inflation. The MPC noted that some of the upside risks to inflation have either reduced or not materialised. This, the policy said, helped open up space for monetary policy accommodation, the. Noting, however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC said it has decided to keep the policy stance neutral and to watch incoming data. “The MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis,” the statement added.

Keeping a firm eye on its objective of keeping inflation in check, the MPC said that several factors contribute to the uncertainty surrounding baseline inflation trajectory. From implementation of farm loan waivers to states implementation of salary and allowances awards, MPC said that inflation could rise due to multiple factors. Also, high frequency indicators suggest that price pressures are building up in vegetables and animal proteins in the near months. There are, however, some moderating forces at work,” the policy observes. All’s not bad though on the inflation front – a second successive normal monsoon, effective supply side measures, general moderation of prices and stable international commodity prices gave the MPC confidence to lower repo rate only by 25 basis points.

According to the policy review, even though inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive. “The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive,” the statement said.

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