INSUBCONTINENT EXCLUSIVE:
Mumbai: The Reserve Bank of India left interest rates and monetary policy stance unchanged but lowered retail price forecast, kindling hopes
of a rate cut if inflation stays benign.
It may be months before the monetary policy committee (MPC) actually cuts rates and RBI governor
Urjit Patel said it is not changing the monetary policy stance of ‘calibrated tightening’ since growth is expected to remain healthy for
the rest of the year.
“If the upside risks we have flagged do not materialise, or are muted in their impact in incoming data, there is a
possibility of space opening for commensurate policy action by MPC,” Patel told reporters
“MPC is of the view that incoming data will ascertain the durable nature of inflation softening and allow better judge- ment on future
Hence, given the assessment that growth is likely to remain healthy for the rest of the year, MPC retains its stance at ‘calibrated
tightening’ so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals.”
The central bank
lowered inflation forecast for the second straight time on Wednesday, projecting a rate of 2.7-3.2 per cent in the second half, from the
3.9-4.5 per cent forecast during the previous policy meet.
For the first half of FY20, inflation is projected at 3.8-4.2 per cent, with
risks tilted to the upside.
Since October, global crude oil prices have slumped about 30 per cent, reducing India’s oil import bill and
bringing down domestic fuel prices
The benchmark bond yield has dipped 50 basis points since then
The Federal Reserve, too, is seen restraining the pace of rate increases next year as growth in US slows
Retail inflation, as measured by the Consumer Price Index, was at 3.31 per cent in October, compared with 3.7 per cent in September.
The
central bank also ruled out any special liquidity window for non-banking finance companies, saying the liquidity situation has been managed
to reflect normal market conditions
However, the regulator promised to act if the situation goes out of hand, which appears remote at this point.
Beginning April, retail
consumers and promoters of small and medium enterprises will have their floating rate borrowing linked to one of the four benchmarks which
includes the yield on 91-day treasury bills and the spread will remain constant till the loan winds down.
RBI also announced a road map for
lowering statutory liquidity ratio by 150 basis points with a 25-basis points cut every quarter, a move that would make more than Rs 1 lakh
crore of funds available for lending.
Repo rate, the rate at which the central bank lends to banks, was kept at 6.5 per cent
All other ratios, including the cash reserve ratio — the proportion of deposits that banks keep with the central bank — were maintained
at existing levels.
An ET poll of 23 market participants did not expect any rate cut, but said MPC could suggest some policy measures to
ease liquidity pressure.
All six members of MPC voted for a pause while Ravindra Dholakia voted for a change in policy stance to
‘neutral’ from ‘calibrated tightening’.
“Given the downside risks to growth, some more members could tilt towards a change in
stance by the next meeting in February,” said Abheek Barua, economist at HDFC Bank
“Governor Urjit Patel also hinted that the conditions are gradually changing and they await more robust inflation signals to consider any
change in policy.”
Bonds rallied 0.13 basis points to end at 7.44 per cent, the lowest yield since April 13
The rupee fell 0.05 per cent to 70.46 to a dollar
The Sensex declined 0.69 per cent to end at 35,884.41 points.
Economic growth outlook has been maintained at 7.4 per cent despite slow
consumption demand in a market where liquidity has been tight and cost of funding has risen for the non-banking finance sector.
“The
acceleration in investment activity bodes well for mediumterm growth potential of the economy,” said Patel
“The time is apposite to further strengthen domestic macroeconomic fundamentals.”
Economic growth slowed in the second quarter to 7.1
per cent owing to the credit squeeze.
While slowing growth may not be a worry yet, RBI said there is sufficient liquidity in the banking
system with the overnight call money rate hovering close to the policy rate.
“The Reserve Bank is guided by and large by the principle of
addressing system-wide liquidity,” said deputy governor Viral Acharya
“RBI also stands ready to be the lender of last resort, but that is provided conditions warrant that sort of an extreme measure.”
