The outgoing Reserve Bank of India (RBI) Governor, Raghuram Rajan, who holds powers setting rates in the central bank, on Tuesday, bade an emotional farewell to the rate cut decision – an USP of the central bank policy which has been generally followed by the banking fraternity in the country for years. The repo rate remains 6.5% and the cash reserve ratio remained unchanged at 4%.
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Its charts show that the central bank expects March 2017 consumer price inflation to remain in a range between 4.8 per cent and 6.3 per cent.
Better than average rainfall in India’s ongoing monsoon season is expected to reduce the upward pressure on food prices.
Inflation stood at 5.4 percent in July, which is the lowest in 45 months, helped by a decline in the prices of non-food items. “However, given the sticky services sector inflation and a likely boost in rural consumption, the fall in headline inflation is unlikely to be drastic enough to encourage more than one policy rate cut in FY17”.
While the RBI chose to hold back from changing key interest rates again, borrowers can now only expect some relief from banks if they decide to pass through earlier policy rate cuts. “From that perspective, this has been a fantastic job”, said Rajan.
Appreciating the move by RBI to go into Open Market Operation (OMO) she added that transmission of rates will happen gradually over the next few months as credit growth picks up pace. The MPC is a “fundamental institutional reform” that will modernize the monetary policy framework, and build a platform for strong and sustainable growth, he said.
With a view to further front-loading the provision of liquidity, Rajan said it has been chose to conduct an open market purchase auction on August 11, 2016. So, the culture of cleaning up (of balance sheet) seems to be well embedded as well as a culture of recovery on some of the loans.
But industry experts have mixed reactions with regard to RBI’s policy stance.
Yields on 10-year New Zealand and Korean bonds also rose as better-than-expected United States jobs data boosted the outlook for global economic growth and led to higher odds of an increase in interest rates by the Federal Reserve this year.
Rajan expressed hope that the next monetary policy decision will be taken by the Monetary Policy Committee, a panel that is being set up by RBI and the government. Meanwhile, the formation of a monetary policy committee is in line with common practice in many central banks around the world.
“If that is the case, then there will be six people, sitting together and deciding what the path on interest rates will be”.
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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. But he said the management of foreign deposit redemptions in coming months while ensuring that the markets are not disrupted, will be the vote of confidence for the new governor.
