Key takeaways from RBI 'status quo' policy statement

The six-member MPC kept the repurchase rate unchanged at a near seven-year low of 6%

The Monetary Policy Committee (MPC) headed by Reserve Bank of India (RBI) Governor Urjit Patel has kept interest rates unchanged, citing upside risks to inflation. It also slashed its growth projections for the fiscal year 2017-18 and raised its inflation projections.

The six-member MPC kept the repurchase rate - the rate at which the RBI infuses liquidity in the banking system - unchanged at a near seven-year low of 6%. 

The committee also maintained the cash reserve ratio (CRR) at 4%, but cut statutory liquidity ratio (SLR) requirement by 50 basis points to 19.5%.

Below are five takeaways from the RBI policy statement: 

1) Policy stance neutral

The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus/minus 2%, while supporting growth. 

2) Inflation outlook

The MPC observed that retail inflation has risen by around two percentage points since its last meeting amid an escalation of global geopolitical uncertainty and heightened volatility in financial markets.    

"These price pressures have coincided with an escalation of global geopolitical uncertainty and heightened volatility in financial markets due to the US Fed’s plans of

balance sheet unwinding and the risk of normalisation by the ECB. Such juxtaposition of risks to inflation needs to be carefully managed. Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil. The possibility of fiscal slippages may add to this momentum in the future," the RBI said in its policy statement.

"The MPC also acknowledged the likelihood of the output gap widening, but requires more data to better ascertain the transient versus sustained headwinds in the recent growth prints," it added. 

The RBI expects retail inflation to range between 4.2-4.6% in the second half of fiscal year 2017-18.

3) Growth projections

The RBI revised down the projection of real GVA growth for 2017-18 to 6.7 per cent from the August 2017 projection of 7.3 per cent on account of growth slowdown in Q1. The central bank observed that the manufacturing sector – the dominant component of industrial GVA – grew by 1.2 per cent in Q1, the lowest in the last 20 quarters.    

"The loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates," the central bank said.  

It, however, believes that the various structural reforms introduced in the recent period will likely be growth augmenting over the medium-to-long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy.

"The Reserve Bank continues to work towards the resolution of stressed corporate exposures in bank balance sheets which should start yielding dividends for the economy over the medium term," the central bank said.  

4) On banks' credit growth

The MPC reiterated that it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed. Recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained, it said. 

The RBI further listed a few measures to revive growth such as “a concerted drive to close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring faster rollout of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states.”

5) On global set-up

The RBI acknowledged that the global economic activity has strengthened further and become broad-based since its August policy review. Among advanced economies (AEs), the US has continued to expand with revised Q2 GDP growing at its strongest pace in more than two years, supported by robust consumer spending and business fixed investment, the central bank said, adding that the recent hurricanes could, however, weigh on economic activity in the near-term. 

It further observed that the economic recovery has gained further traction in the Euro area underpinned by domestic demand, with the Euro area purchasing managers’ index (PMI) for manufacturing soaring to its highest reading in more than six years, while the Japanese economy continued on a path of healthy expansion despite a downward revision in growth since March 2017 on weaker than expected capital expenditure.