RBI keeps key policy rates on hold as uncertainties loom

Even as it sharply cut the inflation projection, the Reserve Bank of India on Wednesday maintained status quo on the policy repo rate. The central bank said that several uncertainties, including the risk of sudden reversal in food prices, uncertain outlook on crude oil prices and possible fiscal slippage, were clouding the inflation outlook.

The decision to pause on the policy repo rate, which was widely expected by bankers and economists, by the six-member Monetary Policy Committee (MPC) was unanimous. However, only one member — Ravindra H Dholakia, former Professor, Indian Institute of Management, Ahmedabad — voted for a change in the monetary policy stance from ‘calibrated tightening’ to ‘neutral’.

In the fourth bi-monthly policy review in October too, the central bank had kept the policy repo rate unchanged at 6.50 per cent.

 

 

At the 5th bimonthly monetary policy press conference, Urjit Patel, Governor, said: “If the upside risks we have flagged do not materialise or are muted in their impact as reflected in incoming data, there is a possibility of space opening for commensurate policy actions by the MPC.” The central bank assured enough liquidity for the financial system, stating that it may step up the frequency and quantum of open market operation purchases of government securities till March-end.

While there was no rate action, the RBI said banks’ Statutory Liquidity Ratio (SLR), which is a slice of deposits that banks have to invest in Central and State government securities, will be reduced by 25 basis points every quarter, beginning January 2019, until it reaches 18 per cent of deposits from 19.5 per cent now. This move will benefit banks as they will be able to channelise more resources towards loans.

While this will have some implication for government securities, “the reduction in oil prices and reversal of foreign flows have resulted in further moderation of yields,” Economic Affairs Secretary Subhash Chandra Garg said in statement.

The RBI cut its inflation projection to 2.7-3.2 per cent for the second half (October 2018-March 2019), with risks tilted to the upside, against 3.9-4.5 per cent projected earlier. It retained the 2018-19 GDP growth at 7.4 per cent.

New MSME rate

The central bank said, come April 1, all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks will be linked to one of the four benchmarks — policy repo rate, the 91-day Treasury Bill yield, the 182-day Treasury Bill yield, any other benchmark interest rate of Financial Benchmarks India.

On balance, the MPC was of the view that incoming data will help ascertain the durable nature of the recent inflation softening and allow better judgment on future policy action. Hence, given the assessment that growth will likely remain healthy for the rest of the year, the MPC retained its stance at ‘calibrated tightening’ so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals.