On the widely expected lines, the Reserve Bank of India (RBI) maintained status quo at the third Bi-Monthly Monetary Policy review. The outgoing RBI governor Raghuram Rajan kept the repo rate unchanged at 6.50 percent at his final policy review after inflation hit a nearly two-year high, but he also said the policy stance remains 'accommodative.' Rajan in the policy review said he expected 'upside' risks to his March inflation target, citing a hike this year in the salaries of millions of government employees with the full implementation of the recommendations of the 7th central pay commission (CPC) and sticky core inflation.
After assessing the current and evolving macroeconomic situation the RBI 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, RBI said that since the second bi-monthly statement of June 2016, the global economy has seen slower than anticipated growth in Q2 of 2016, across advanced economies. Among emerging market economies, GDP growth stabilised in China in Q2, while recessionary conditions were gradually diminishing in Brazil and Russia, but the near-term outlook is still fragile due to policy uncertainties and soft commodity prices. On the domestic front, several factors are helping to support the recovery. By early August, the cumulative rainfall was 3 per cent higher than the long period average, with more than 80 per cent of the country receiving normal to excess precipitation. Industrial production picked up in May on the back of manufacturing and mining. Business confidence is also looking up in recent months, though the Reserve Bank’s survey for March 2016 suggests that capacity utilisation, seasonally adjusted, is still weak. Retail inflation measured by the headline consumer price index (CPI) rose to a 22-month high in June. Liquidity conditions eased significantly during June and July on the back of increased spending by the Government which more than offset the reduction in market liquidity because of higher-than-usual currency demand.
Rationale for the policy decision- For its policy stance the apex bank said that the recent sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year. It also said that the full implementation of the recommendations of the 7th central pay commission (CPC) on allowances will affect the magnitude of the direct effect of house rents on the CPI. It retained inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside. However, it also said that the momentum of growth is expected to be quickened by the normal monsoon raising agricultural growth and rural demand and retained the GVA growth projection for 2016-17 at 7.6 per cent, with risks facing the economy at this juncture evenly balanced around it.
As regards the management of the imminent FCNR (B) redemptions, it said that the Reserve Bank has been frontloading liquidity provision through open market operations and spot interventions/deliveries of forward purchases and it will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR (B) redemptions without market disruptions.
