Reserve Bank of India (RBI), much on expected line maintained a status quo in its Sixth Bi-monthly Monetary Policy Statement, saying it would want to wait for more inflation data and the Union Budget before taking action. It said that the Indian economy was prodding along well, but it would take into consideration steps taken in the Budget that would boost growth while keeping inflation in check.
On the basis of an assessment of the current and evolving macroeconomic situation, it decided to:
• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.75 per cent;
• keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL);
• continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
• continue with daily variable rate repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent.
In its assessment the central bank said that since the fifth bi-monthly statement of December 2015, global growth has slowed, with the ongoing weakening of activity in major emerging market economies (EMEs) outweighing the recovery in some advanced economies (AEs). Regarding domestic economy, it said that economic activity lost momentum in Q3 of 2015-16, pulled down by slackening agricultural and industrial growth. It added that in the first two months of Q3 of 2015-16, industrial activity slowed in relation to the preceding quarter. This mainly reflects weak investment demand with some deceleration of capital goods production. Stalled projects continue to remain high, and there is a decline in new investment intentions, perhaps on the back of low capacity utilization.
Regarding inflation, the assessment said that retail inflation measured by the consumer price index (CPI) rose for the fifth month in December across all constituent categories. While the upturn in December essentially reflected unfavourable base effects, the ongoing seasonal decline in prices of fruits and vegetables could temper headline inflation in the near-term. CPI inflation excluding food and fuel rose for the fourth successive month. The RBI governor later stated that we have not factored in the Seventh Pay Commission in our inflation targeting. We have to see how it is implemented. Broadly speaking, the risks to inflation are balanced as of now. There are also factors that can pull inflation down - like a good monsoon. It is not fair to read that RBI has become more hawkish over time. We expect the inflation rate to be 5 per cent by March 2017.
RBI further in its assessment said that liquidity conditions tightened in the second half of December with advance tax outflows. Tightness spilled over into January 2016 on the back of a seasonal pick-up in demand for currency, restrained spending by the government and a pick-up in bank credit growth, in relation to deposit mobilisation. RBI governor said that marginal cost of funding will actually help in transmission of rates. It will be an improvement over the (earlier) base rate (calculation for interest rates).
It also said that for 2016-17, growth is expected to strengthen gradually, notwithstanding significant headwinds. Expectations of a normal monsoon after two consecutive years of rainfall deficiency and kept its growth projections for Indian economy unchanged at 7.4 percent for the current fiscal, a tad higher than 7.3 percent forecast by the World Bank. Based on an assessment of the balance of risks, GVA growth for 2016-17 is projected at 7.6 percent. Now the first bi-monthly monetary policy statement for 2016-17 will be announced after the Budget on Tuesday, April 5, 2016.
