India cenbank leaves policy rate unchanged, cuts inflation projection
- Author: Zachary Reyes Jun 07, 2017,
Jun 07, 2017, 20:32
Industry chamber Assocham said the Reserve Bank (RBI) has "disappointed India Inc" by not reducing the policy interest rates, specially when inflation remains quite benign. It also gave a boost to the housing sector by cutting risk-weights on new home loans and reducing the standard asset provisioning. SLR is a defined percentage by RBI, which regulates that the banks need to spend a percentage of their deposits in specified financial securities, often owned by State and central governments.
He said seldom have economic conditions warranted a substantial monetary easing as they are now.
"As the year progresses, underlying inflation pressures, especially input costs, wages and imported inflation, will have to be closely and continuously monitored", the RBI said. "Furthermore, the reductions in banks' lending rates post-demonetisation should support both consumption and investment demand of households and stress-free corporates", the MPC statement said.
The minutes of the MPC's meeting will be published by June 21.
The board of the central bank was made responsible for monitoring the governor's performance in achieving the agreed target, but was to have no part in decision-making with regard to monetary policy.
Finance Minister Arun Jaitley had said inflation has been under control for long and is likely to remain so on the back of good monsoon and unlikely spike in oil prices. Premature action at this stage risks disruptive policy reversals later and the loss of credibility.
The equity markets remained unmoved by the RBI decision. But GDP growth of 6.1 per cent in the January-March quarter was slowest in two years. The monetary policy report is projecting a much lower inflation at 2-3.5 percent in H1 and 3.5-4.5 per cent in H2. There was little reason for the central bank to change its neutral stance for now till growth and inflationary trends become clear. The statement did not say how the dissenting member, Ravindra H. Dholakia, a professor, voted. Monetary policy can play a more effective role only when these factors are in place.
RBI raised concerns over the possibility of fiscal slippages due to the farm loan waivers.
"There is a likelihood that the official CPI and GVA inflation projections have revised down on 7 June, producing room for policy guidance to soften", said Radhika Rao, India Economist, DBS.
The apex bank maintained at 4 per cent the cash reserve ratio (CRR), or the quantum of liquid funds which commercial banks have to keep.
There is also greater clarity on the rainfall, with the IMD predicting for a normal monsoons this season which can help the food inflation situation.
"The implementation of the GST is not expected to have a material impact on overall inflation", RBI said. India's largest indirect tax reform is expected to be rolled out on July 1 and adjustment issues are expected.
The RBI shifted its policy stance to "neutral" in early 2017, allowing it the flexibility to move in either direction, from "accommodative" stance for two years.
The 30-scrip Sensitive Index (Sensex) of the BSE, which opened at 31,252.71 points, traded at 31,197.46 points - up 6.90 points or 0.02 per cent from its previous close at 31,190.56 points.