Much on the expected line, the Reserve Bank of India (RBI) maintained a status quo in its second Bi-monthly Monetary Policy review. The central bank which had lowered rate by 25 bps to 6.5 per cent in the last policy review in April, sounded a bit hawkish this time, citing higher upside risks to ‘inflation trajectory’ for keeping the rates unchanged. However, the central bank said it will remain accommodative provided data are supportive, signaling it could cut rates later this year if monsoon rains, and other factors, dampen upward pressure on food prices. It further said that deposit growth has been strong during April and May, which will ultimately lead to lowering of lending rates by banks.
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 6.5 per cent;
keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL); and
continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.
Consequently, the reverse repo rate under the LAF will remain unchanged at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent.
In its assessment of the economy, the RBI said that since the first bi-monthly statement of April 2016, global growth is uneven and struggling to gain traction. World trade remains muted in an environment of weak demand. Global financial markets have recorded gains through Q2 of 2016, spurred by risk-on investor sentiment. Portfolio flows are returning, albeit hesitantly, to EME debt and equity markets. The firmness in crude prices that set in around mid-March has been supported in subsequent weeks by some temporary reductions in global supply. Regarding currencies, it said that the US dollar continues to mirror changes in expectations of monetary policy action by the Fed. The yen and the euro have remained strong despite ultra-accommodative monetary policies.
On the domestic front, the RBI said that deceleration of services sector activity led to decline in estimate of gross value added (GVA) for 2015-16 marginally. Going forward, the realization of Met departments, prediction of an above-normal and well-distributed south west monsoon is critical. It further said that the index of industrial production decelerated in 2015-16, mainly pulled down by weak manufacturing in an environment of subdued investment demand and weak rural consumption. Though, it also noted that there are signs that corporate performance is improving. Available information on Q4 earnings suggests double digit growth in EBITDA levels for non-financial corporates. Public investment, especially in roads and railways, is gaining strength, though the continuing weakness in private investment is of concern. Demand conditions are likely to improve going forward. It also said that on a reassessment of balance of risks, therefore, the GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced.
The central bank was concerned about spurt in inflation and said that retail inflation measured by the consumer price index (CPI) rose more sharply than expected in the month of April due to a more-than-seasonal jump in food prices. CPI inflation excluding food and fuel edged up in April, driven by prices of petrol and diesel embedded in transport and communication. It also said that exports declined for the seventeenth consecutive month in April in US dollar terms in spite of a modest increase in volume.
For its monetary policy stance it said that domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the Seventh Pay Commission award, while the inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain. It said that given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative and it will monitor macroeconomic and financial developments for any further scope for policy action.
