Forbes India 15th Anniversary Special

RBI holds rates for now, eyes Budget for further action

Governor Rajan says the central bank remains "accommodative" in its stance as it awaits more data on inflation

Salil Panchal
Published: Feb 2, 2016 01:20:14 PM IST
Updated: Feb 2, 2016 03:48:12 PM IST
RBI holds rates for now, eyes Budget for further action
Image: Shailesh Andrade / Reuters
The RBI, on Tuesday, projected India’s GDP to grow at 7.4 percent for the twelve months to March 2016

The Reserve Bank of India (RBI) kept its key repo rate—the rate at which the central bank lends to commercial banks—unchanged at 6.75 percent on Tuesday, as was widely expected by economists. The central bank has now kept rates on hold since December last year.

But Governor Raghuram Rajan maintained that the RBI continues to be “accommodative” in its policy stance [this indicates a loose monetary policy where rates are lowered to stimulate economic growth], as it awaited more data relating to inflation.

“Structural reforms in the forthcoming Union Budget that boosts growth while controlling spending, will create more space for monetary policy to support growth,” Rajan said in a policy statement released on the central bank’s website. The Union Budget for FY17 will be presented on February 29.

After the RBI decision to hold rates was announced, the stock markets were largely flat. The benchmark Sensex was up 0.10 percent, or 23.6 points, at 24,848.43 points while the Nifty had edged down 0.03 percent to 7,553.85 points in afternoon trade.

Rajan said he expects inflation to be on its “projected path” of 5 percent by March 2017, assuming a “normal” monsoon this year, after two weak ones, and oil prices at current levels. “However, the implementation of the VII Central Pay Commission award, which has not been factored into these projections, will impart upward momentum to this trajectory for a period of one to two years,” the central bank statement added.

India’s annual consumer price inflation (CPI) had accelerated to 5.61 percent in December, compared with 5.41 percent in November, according to official data released earlier this year.

The RBI, on Tuesday, projected India’s GDP to grow at 7.4 percent for the twelve months to March 2016 while this was pegged marginally higher at 7.6 percent for FY17.
 
“For 2016-17, growth is expected to strengthen gradually, notwithstanding significant headwinds. Expectations of a normal monsoon after two consecutive years of rainfall deficiency, the large positive terms of trade gain, improving real incomes of households and lower input costs of firms should contribute to a strengthening of the growth momentum,” Rajan said in the statement.

Economists Expect More Cuts

Economists said they expect further rate cuts in coming quarters. “While the RBI has left the door open for further rate cuts, it seems to be conditioning such action upon the quality of fiscal spending, and overall consolidation of the deficit targets,” said Siddhartha Sanyal, chief India economist with Barclays. He forecasts a further 50 basis points of repo rate cuts during the first half of calendar year 2016.

“RBI’s policy guidance was more balanced than dovish,” said Radhika Rao, India Economist with DBS Bank.

The RBI lowered the repo rate by 125 basis points in 2015, which included a higher-than-expected 50 basis point cut in September last year.

Rajan reiterated his hope that Indian banks will clean up their balance sheets [of bad loans] by March 2017. The RBI has introduced several regulations and powers to boost governance at the boards of banks. Massive recapitalisation of state-owned banks from the government is awaited, which will help them to start lending more as economic growth picks up.

“We have given banks time to regularise [their accounts]. Our role is to make sure that the process is uniform across banks and assets which could go bad as classified and recognised as such,” Rajan told the media on Tuesday.

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