India cenbank leaves policy rate unchanged, cuts inflation projection

Gladys Abbott
June 8, 2017

Only one of the six MPC members voted against leaving interest rates unchanged, the first split in the five meetings since the panel was formed last September.

Headed by Patel, MPC for the fourth straight time kept the repo rate unchanged, at which it lends to the banks, at 6.25 per cent.

The RBI, however, cut the statutory liquidity ratio-the portion of bank deposits that have to be invested in government bonds-by 50 basis points to 20%.

"Seldom have economic conditions and outlook pointed so strongly towards monetary policy easing", he said.

The RBI is unlikely to cut rates at its policy review next week but the tone of the statement will be less hawkish than the previous one, rating agency ICRA said. "MPC experiment is in its first year", he said. "All MPC members declined the request of the Finance Ministry for that meeting", Patel said.

"The meeting did not take place", he told reporters here.

Meanwhile, at the press conference in Mumbai to announce the policy review, the RBI Governor disclosed that the Monetary Policy Committee had turned down the Finance Ministry's invite for a discussion here ahead of its meeting.

A rate cut encourages consumers to spend, usually causing a spur in growth, and Indian Finance Minister Arun Jaitley called for a reduction in the rate this week owing to a sharp fall in inflation. "Premature action at this stage risks disruptive policy reversals later and the loss of credibility", it said.

The slowdown was largely attributable to the government's shock decision last November to remove large denomination banknotes from circulation.

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Consumer price inflation rose by just 2.99 per cent in April, the weakest on record. Gross domestic product expanded by 6.1 percent in the January to March quarter, the slowest in two years, and India ceded its crown as the fastest growing major economy to China during the period.

RBI also hinged its growth projection of 7.3% on the continuing remonetization, which is now 82.6% complete.

Further, the twin balance sheet problem - over-leveraged corporate sector and stressed banking sector - may delay the revival in private investment demand, it said.

Urjit Patel, governor, RBI, said, "The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers".

The resolution of the MPC will be placed on the website in the afternoon of June 7, the central bank said in a statement.

There is also greater clarity on the rainfall, with the IMD predicting for a normal monsoons this season which can help the food inflation situation.

Now, if you are talking about an extremely high target, say 17%, then I'd expect more volatility, as it's unlikely the next government or central bank head would agree with that sort of specific number. However, with the new tax regime under GST kicking in from July 01, the RBI would have probably chose to wait and watch if the fall in prices is sustainable. The central bank had changed its monetary policy to "neutral" from "accommodative" in February, leaving it open to raise, or lower, rates in months ahead.

Targeting inflation rather than some real economic variable reflects the academic wisdom of the time that the best contribution that monetary policy can make to economic growth and employment is to ensure that the price system works effectively. It kept at 4 per cent the cash reserve ratio (CRR), or the quantum of liquid funds the commercial banks have to keep.

It touched a high of 31,346.99 points and a low of 31,172.98 points during intra-day trade.

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