 "RBI Governor Raghuram Rajan at the fifth bimonthly monetary policy review in Mumbai on Tuesday, December 1, 2015 PTI")
The Reserve Bank of India (RBI) on Tuesday kept its policy rates unchanged, as banks are yet to pass on more than half of the cumulative 125 basis points rate cut in the year. But the central bank said more cuts could be expected in an economy that had started showing signs of some robust growth in a few pockets.
“We are still accommodative. That is very clear. And we are always vigilant,” RBI Governor Raghuram Rajan said in a post-policy interaction with the media, adding “What we have is an economy well and truly in recovery but with areas of weakness. Hopefully, as we go forward, some of the areas of weakness will turn around.”
After the fifth bi-monthly monetary policy review for the year on Tuesday, the policy rate, the repo (at which banks borrow from RBI) remained unchanged at 6.75 per cent. The cash reserve ratio (CRR) remained at four per cent. The accommodative stance allowed bond yields to fall and the rupee to strengthen. While yields on the 10-year bond closed at 7.72 per cent, from 7.786 per cent on Monday, the rupee strengthened to close at 66.50 a dollar from 66.67 earlier.
While the recent spike in prices is something the central bank would be vigilant about, inflation is following an expected path and might rise further till December before plateauing, due to benign oil prices, RBI said in its policy statement.
Prices of pulses pushed Consumer Price Index-based inflation to a four-month high of five per cent in October but well within the reach of RBI’s January target of five per cent.
“There are obviously some upside and downside to consumer price inflation,” Rajan said in the press conference. Adding: “When the time (is) warranted, we are always prepared to move off-cycle but when times normalise, we prefer staying with the policy cycle.” Indicating the central bank was prepared to respond as and when it was warranted by situations like US Federal Reserve rate increases or Europe’s quantitative easing or even China taking steps to come out from a slowdown.
“There are some residual uncertainties about what the (US) Fed will do, but my sense is that after an initial bout of volatility, we probably should see Indian markets stabilise and come through. It’s not the central factor in our deliberations, going forward,” Rajan said.
The central focus, though, would still be inflation.
“The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to five per cent by March 2017,” said the policy document.
Transmission
The space will arise when further transmissions of the cumulative rate cuts take place. In response to RBI’s cuts earlier this year, banks have passed on about 60 basis points of rate relief to customers.
To ensure effective transmission, RBI said it would shortly finalise the methodology for banks to compute their base rate (BR) on a marginal cost of funds basis, from the existing cost of funds-based method. Thus, every rate action by RBI will channel into banks’ lending rates through money market rates that get affected first by monetary policies. Further, the government is examining linking of small savings interest rates to market rates, RBI said.
“The guidelines on the BR calculation based on marginal cost of funds will be watched and appropriate action taken,” said State Bank of India’s chairperson, Arundhati Bhattacharya.
“As the impact of monetary policy measures taken so far play out in terms of bank funding costs, lending rates are expected to continue to moderate,” said ICICI Bank’s managing director and chief executive (MD & CEO), Chanda Kocchar.
Bandhan Bank’s MD and CEO, Chandra Shekhar Ghosh, said banks would be able to cut rates after those on small savings became market-related. “Once the small savings rates are pared, banks will be in a position to cut their deposit rates and bring down the cost of money,” he said.
RBI will watch how the government implements the seventh pay commission recommendations, and how the rise in pay will affects wages and rents. Besides, Rajan said, commercial banks should be able to clean up their balance sheets fully by March 2017, making them more effective in contributing to economic growth.
RBI said the economy had started showing some ‘green shoots’ of recovery. Urban consumer demand remained healthy in the second quarter, even as rural demand suffered due to insufficient rain. According to RBI, there are signs of strong growth in the economy but still at an early stage. The second quarter’s gross domestic product growth was 7.4 per cent, higher than the seven per cent in the first quarter.
“We (government and RBI) are all working together to ensure growth takes place. I think it is in our collective interest, and I kept emphasising and I will emphasise again, RBI is not against growth,” Rajan said in the media interaction. “We need sustainable growth, we will ensure there is sustainable growth and we will ensure the maximum sustainable growth we can get.” “Sustainable” means within the bounds of inflation the central bank was willing to accept.
Overall, “the economy is in the early stages of a recovery, though with some areas of continued weakness”.
Demand in the rural economy remained subdued, even as urban consumption showed signs of pick-up. New projects, though, are coming up strongly and it remained to be seen “whether growing public investment can crowd in private investment on a sustained basis, despite the still-low capacity utilisation”.
