Also, the central bank kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 percent of net demand and time liabilities (NDTL) and continued 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. “You can interpret them any which ways you want”, Rajan said. Strong improvement in sowing on the back of good monsoon rains and supply-side management auger well for food inflation outlook, he added. Accordingly, the RBI has retained the growth projection for 2016-17 at 7.6 per cent with the assessment that risks facing the economy at this juncture are evenly balanced around it.
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“To emphasise this point, we announced an Open Market Purchase today”. But they recovered some ground eventually.
Presenting his last monetary policy review, Rajan came down heavily on banks for “only modestly” passing on the benefits of previous five policy rate cuts since January 2015, on one pretext or the other. Retail inflation in June was 5.77 per cent, well above the 5 per cent target set by the central bank.
The RBI also expects consumer spending to go up because of the increase in pay, pension, and arrears on the implementation of the seventh central pay commission. Now I hear from some that it is fear of the FCNR (B) redemptions that is making them reluctant to cut rates. As such based on our inflation forecast and the RBI’s stated real rates target of 1.5-2%, we expect another 50bp of rate cuts in F2017.
Although successive RBI governors did talk about it, it is Rajan who tied the government and the RBI into a legal knot. “A pick-up in credit demand, which would follow the economic recovery and competition for corporate loans after the ongoing balance sheet clean-up by the state-run lenders, will ensure softer lending rates”, he said.
Loose monetary policies may continue for longer in advanced economies: Brexit – an unexpected event that materialised on June 23 – not only rattled the financial markets but also added more uncertainty to global growth prospects, especially the United Kingdom and Europe. “GST-led inflation could lead to a one-time price adjustment”, he said. “I don’t think it will mean that the spigot will be open and suddenly we will see a huge amount of rate cuts, but the possibility of cuts can not be ruled out”.
But although interest rates are at their lowest level since 2011, there have been tensions with the ruling Bharatiya Janata Party (BJP) which has been pushing for deeper cuts, saying these would boost growth further.
“Going ahead, we expect a significant cut in repo rate to facilitate the competitiveness of the manufacturing sector and to compete in the worldwide market”, Mahesh Gupta, President, PHD Chamber of Commerce and Industry was quoted in a statement.
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The next governor will need to assess whether the revival of the monsoon has created space for India to follow nations like Malaysia and Australia in monetary easing as risks to the global economy mount.
