While the Reserve Bank of India still wants to continue with the wait and watch policy on demonetisation impact, both domestic and global situation may not be conducive for further policy rate cuts in the near future.
Even though there was expectation of a 25 basis point rate cut today by the Reserve Bank of India, the Monetary Policy Committee (MPC) of the apex bank has rightly decided to put a pause on interest rate cut for now, keeping the policy repo rate unchanged at 6.25%.
This stance appears set to continue for some time now. In its outlook, the MPC has said: “The Committee remains committed to bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner. This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky. The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out.”
The areas to watch going ahead are, seasonal impact on food inflation, international crude oil prices moving up along with global growth sentiments inching ahead, and expected pick-up in the domestic GDP growth rate after the demonetisation impact fizzles out.
In any case rate cut at this juncture is not going to serve any purpose, unless lending picks up – banks are already flush with funds, thanks to demonetisation, but there are few takers.
The MPC has stressed that surplus liquidity (with banks) should decline with progressive remonetisation and the Central bank is “committed to ensuring efficient and appropriate liquidity management… to ensure close alignment of the WACR (weighted average call money rate) with the policy rate, improved transmission of policy impulses to lending rates, and adequate flow of credit to productive sectors of the economy”.
That, though, is not going to be easy. “The Committee believes that the environment for timely transmission of policy rates to banks lending rates will be considerably improved if (i) the banking sector’s non-performing assets (NPAs) are resolved more quickly and efficiently; (ii) recapitalisation of the banking sector is hastened; and, (iii) the formula for adjustments in the interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented,” RBI said in its policy statement.
This is certainly not a good news for the people keeping money in small saving schemes as interest rates on small savings continue to remain very high — while the yield on a 5-year G-Sec has reduced from 7.378% in April 2016 to 6.179% early January this year, interest rates on 5-year NSCs are still at 8% (down from 8.5% in FY16).