The Reserve Bank of India unexpectedly left its key policy rates unchanged and signalled the end of its rate-cut cycle as it moved to keep inflation under check.
The RBI has been keeping a close watch on the increasing prices of global commodities, such as crude oil and base metals, and a strengthening dollar. The central bank said this could trigger inflationary conditions in the domestic economy.
RBI Governor Urjit Patel said “clouded” data after demonetisation had also made it difficult to have a clear assessment of the macroeconomic situation.
The apex bank shifted its monetary policy stance from ‘accommodative’ to ‘neutral’.
All six members of the rate-setting monetary policy committee (MPC) voted in favour of leaving the policy repo rate unchanged at 6.25 per cent. In the previous policy review too, the rate was kept on hold.
Explaining the decision, Patel said: “In this policy review, a clear assessment of the evolving macroeconomic configuration, at least in the short-run, remains clouded by the transitory effects of demonetisation....”
“On the inflation front, transient factors, including anecdotal evidence on fire sales of perishables, have discoloured an objective assessment of inflation pressures. For example, if vegetables are excluded, CPI (consumer price index) inflation would exceed the Central Statistical Organisation’s official print for the month of December, which was 3.4 per cent, by as much as 140 basis points.”
The Governor said the shift in stance to ‘neutral’ is aimed at meeting the inflation target of 4 per cent.
Banks can cut lending rates Patel emphasised that banks still have scope to cut lending rates. He reasoned that while the RBI had cut the repo rate cumulatively by 175 basis points since January 2015, banks’ weighted average lending rate had come down by only about 80-95 basis points, at the most.
The MPC, Patel said, believes that the environment for timely transmission of policy rates to bank lending rates will be considerably improved via quick resolution of bad loans, speedier recapitalisation of public sector banks and full implementation of the formula for determining interest rates on small savings.
SBI Chairman Arundhati Bhattacharya said: “The RBI view is right that monetary policy transmission will improve further if NPAs are resolved, capital position of banks improves and small savings rates are more market driven. Regarding the change of stance from accommodative to neutral, it may be a little early to shift the stance.”