Dissent among MPC and other takeaways from RBI policy

MPC members unanimously declined to meet Finance Ministry officials, said Urjit Patel

The Reserve Bank of India (RBI) held its repo rate at 6.25% as widely expected in its second bimonthly policy for FY18 saying the monetary policy committee is keen to avoid 'premature' action at this stage. It, however, lowered its CPI projections after recent data showed consumer prices rising more slowly.

The central bank cut its statutory liquidity ratio (SLR) by 50 bps to 20% starting June 24. The RBI also left its reverse repo rate unchanged at 6% after a surprise 25 basis point increase in April.

“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% within a band of +/- 2%, while supporting growth,” said RBI in its statement.

The domestic stock market didn’t react much to the policy as most expected the same outcome.

The vote by the central bank's monetary policy committee was 5-1, the first dissent in the five meetings since the MPC was formed last September.

Here are the takeaways from the Monetary Policy Review:

Maintains status quo but cuts SLR: RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25%. The RBI last changed its repo rate in October 2016.

Consequently, the reverse repo rate under the LAF remained at 6%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.50%. However, cut its statutory liquidity ratio (SLR) by 50 bps to 20% starting June 24.

“In order to give greater flexibility to banks to comply with the LCR requirement in an efficient manner, it has been decided to reduce the SLR from 20.5% of net demand and time liabilities (NDTL) to 20% of NDTL with effect from the fortnight beginning June 24, 2017,” the central bank said.

Inflation: The RBI lowered its inflation forecast for the current financial year after the retail inflation fell to a record low of 2.99%, well below RBI’s own target of 4%. The RBI however cautioned that the inflation needs to be assessed as to whether or not the unusually low momentum in the reading for April will endure, stating it to be ‘abrupt and significant’. It also said that implementation of GST will not have an overall impact on the inflation.

"If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5% in the first half of the year and 3.5-4.5% in the second half," it said in a statement.

Noting that inflation has fallen below 4% only since November 2016, the MPC remains focused on its commitment to keeping headline inflation close to 4% on a durable basis keeping in mind the output gap.

The MPC also noted that incoming data suggest that the transitory effects of demonetisation have lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits vegetables, pulses, and cereals.

GDP Growth: The RBI revised the projection of real GVA growth for 2017-18 to 7.3% from the April 2017 projection of 7.4%.

“The continuing remonetisation should enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy. Furthermore, the reductions in banks’ lending rates post-demonetisation should support both consumption and investment demand of households and stress-free corporate,” the central bank said in the statement.

The current account deficit (CAD) for the year 2016-17, however, is likely to remain within 1% of GDP. Unlike in the immediately preceding quarter, capital flows in April-May 2017 were dominated by foreign portfolio investment (FPI), pushed out by risk-on investor sentiment as global growth prospects improved,” the Central Bank said.

Reduction in Risk-Weight for Housing Loans: Considering the importance of the housing sector and given its forward and backward linkages to the economy, it has been decided, as a countercyclical measure, to reduce the risk weight on certain categories of housing loans sanctioned on and after today. It has also been decided to reduce the standard asset provisioning rate on such loans.

Addressing NPA issue: The Reserve Bank will continue to work in partnership with the government to address the stress in banks’ balance sheets. Better alignment of administered interest rates on small savings with market rates and stepped-up recapitalisation of banks to facilitate adequate flow of credit to productive sectors are important steps to follow through.

Other highlights:

Marginal standing facility (MSF) rate and the Bank Rate unchanged at 6.50%.

However HTM requirements remain unchanged 

The decision was not unanimous.  One dissented against status quo

The implementation of the GST is not expected to have a material impact on overall inflation, says RBI