As was widely expected, the Reserve Bank of India decided to maintain status quo on the repo rate in the fifth bi-monthly monetary policy review even as it underscored its neutral stance on the monetary policy. The rate setting Monetary Policy Committee (MPC) reiterated its commitment to keeping the consumer price index-based inflation at a target of 4 per cent whilst supporting growth. The MPC noted that the evolving inflation trajectory needs to be carefully monitored. It observed that two of the key factors determining the cost of living conditions and inflation expectations — food and fuel inflation, edged up in November. Inflation expectations of households surveyed by the Reserve Bank have already firmed up and any increase in food and fuel prices may further harden these expectations. According to the MPC, rising input cost conditions, as reflected in various surveys, point towards higher risk of pass-through to retail prices in the near term. It cautioned that implementation of farm loan waivers by select States, partial roll-back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation. RBI Governor Urjit Patel fielded a few questions from the media after the announcement of the bi-monthly policy review. Excerpts:
What do you make of inflation estimates being nudged up but growth projection being retained?
We have a neutral stance, which means that data flow in the coming months and quarters will determine what we do regarding the policy. So, the neutral stance is there for a reason that all possibilities are on the table and we would look carefully at both the inflation and growth data that come in the coming months. The change in our inflation projection is, at the end of the day, very small — it is 10 basis points (higher) compared with the October policy and we are still retaining the growth out-turn for the full year at what it was in the October policy.
We did not consider shifting the stance because nothing between October to now was significant enough in terms of the macro outcomes to warrant that and we will look at the data in the coming months and the coming quarter or two and decide on the policy.
When will the next cycle of lending kick-start?
The latest data on bank credit and adjusted bank credit and total financial resources flows suggest that we are already on the uptake in terms of credit growth. So, credit is already flowing, more than what was the case in October. And as the economy picks up, the demand for credit should go up and there is enough supply to ensure that lack of credit is not in the way of supporting higher growth. So, the uptick in credit growth has already happened.