While keeping key rates unchanged, the RBI said expectations of a normal monsoon after two consecutive years of rainfall deficiency, the large positive terms of trade gain, improving real incomes of households and lower input costs of firms should contribute to strengthening the growth momentum in FY2016-17
The Reserve Bank of India (RBI), in its last bi-monthly credit policy review on Tuesday for FY2015-16 has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged. With repo rate remaining at 6.75%, the reverse repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 5.75%, and the marginal standing facility (MSF) rate and the bank rate at 7.75%.
In a statement, RBI Governor Dr Raghuram Rajan said, "The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17."
"The current momentum of growth is reasonable, though below what should be expected over the medium term. Underlying growth drivers need to be rekindled to place the economy durably on a higher growth trajectory. The revival of private investment, in particular, has a crucial role, especially as the climate for business improves and fiscal policy continues to consolidate. The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened," he added.
According to RBI, inflation has evolved closely along the trajectory set by the monetary policy stance. It said, "With unfavourable base effects on the ebb and benign prices of fruits and vegetables and crude oil, the January 2016 target of 6% should be met. Going forward, under the assumption of a normal monsoon and the current level of international crude oil prices and exchange rates, inflation is expected to be inertial and be around 5% by the end of fiscal 2016-17."
"However, the implementation of the Seventh Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years. The Reserve Bank will adjust the forecast path as and when more clarity emerges on the timing of implementation. Vagaries in the spatial and temporal distribution of the monsoon and the impact of adverse geo-political events on commodity prices and financial markets add additional uncertainty to the baseline," the central bank added.
Arundhati Bhattacharya, chairman of State Bank of India (SBI) said, “With the RBI clearly mentioning that inflation trajectory is evolving as per apex bank expectations there are reasons to believe that RBI will continue in an accommodative mode. However, on liquidity front, there remains a concern with systemic liquidity deficit well in excess of the prescribed 1% NDTL currently. With revised Liquidity Coverage Ratio kicking in and deposit growth lagging, RBI may have to be proactive in managing the liquidity deficit through tools available at its disposal.”
According to Nomura, the RBI's policy stance remains accommodative. "Even though the RBI did not cut rates today, it remains data-dependent with the upcoming budget (quantity and quality of fiscal consolidation) and the inflation trajectory to play a pivotal role. In our base case, we expect the RBI to deliver a 25bp rate cut after the budget is released at its scheduled April policy meeting, although we do not rule out an earlier inter-meeting cut after the budget is released but before the April policy meeting. Beyond this, we expect the RBI to stay on hold, as we do not expect CPI inflation to undershoot the RBI's 5% target on a sustained basis, due to the ongoing growth recovery and still-high inflation expectations," it added.
Radhika Rao, India Economist, DBS Bank, said, "The policymakers interpreted on-going liquidity squeeze as temporary or seasonal rather than structural, which saw policymakers leave the reserve ratios intact. In the post-policy comments, RBI Governor Rajan highlighted that the firm 10-year yields were not only a reflection of inflation concerns domestically but also elevated yields amongst the emerging market peers in light of external volatility".
RBI said, prospects for the rabi harvest are improving slowly. The near-term outlook for industrial activity may be constrained by adverse base effects in fourth quarter and still weak exports, although the pick-up in corporate profitability on the back of declining input costs may provide an offset. Some categories of services are likely to gain momentum on expectations of higher activity in coming months, though the aggregate state of activity remains muted. On balance, therefore, GVA growth for 2015-16 is kept unchanged at 7.4% with a downside bias.
For 2016-17, RBI sees the growth to strengthen gradually, notwithstanding significant headwinds. "Expectations of a normal monsoon after two consecutive years of rainfall deficiency, the large positive terms of trade gain, improving real incomes of households and lower input costs of firms should contribute to strengthening the growth momentum. Yet, still weak domestic private investment demand in a phase of balance sheet adjustments, re-emergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening export growth could act as headwinds. Based on an assessment of the balance of risks, GVA growth for 2016-17 is projected at 7.6%," it said.
Umesh Revankar, MD, Shriram Transport Finance Company Ltd, said, "While we understand that the RBI is perhaps holding up for the front loading cuts to get transmitted in the system, more such cuts are still needed from the RBI. As this should trigger the banking system to start responding or else in this tug of war we could continue to see a status quo on the economy and the future growth prospects of India Inc. Our sense says 25 - 50 bps rate cut over the next six months should provide some respite to retail borrowers, besides corporate India on the cost of funds and it may trigger them to start investments."
Talking about the government's Start-up India initiative, RBI said it will take steps to ease doing business and contribute to an ecosystem that is conducive for growth of start-ups and issuing a detailed statement separately. "These measures will create an enabling framework for receiving foreign venture capital, differing contractual structures embedded in investment instruments, deferring receipt of considerations for transfer of ownership, facilities for escrow arrangements and simplification of documentation and reporting procedures," it added.
Here are the latest policy rates following RBI review…
Repo Rate.......................6.75%
Reverse Repo Rate..........5.75%
CRR.................................4%
Bank Rate.......................7.75%
The first bi-monthly monetary policy statement for FY2016-17 will be announced on 5 April 2016.
