RBI keeps policy rate unchanged; sees demonetisation pain easing by March
The central bank marginally cut its gross value added growth forecast for the current year to 6.9 percent from the previous 7.1 percent
The Reserve Bank of India's Monetary Policy Committee (MPC) on Wednesday kept the central bank's key policy rate - the repo rate - unchanged at 6.25 percent despite falling inflation, as it felt the timely transmission of rates to banks will improve once NPAs come come down, while banks get the required funds and small savings rates align with the market rates.
However, the central bank marginally cut its gross value added growth forecast for the current year to 6.9 percent from the previous 7.1 percent. For the next fiscal year ending 2017-18, the central bank sees GVA growth to accelerate to 7.4 percent. According to RBI, factor that will help growth recovery is the government's emphasis on stepping up capital expenditure in the Union Budget 2017-18. The budget's boost for the rural economy and affordable housing is also expected to contribute to growth.
"The Committee believes that the environment for timely transmission of policy rates to banks lending rates will be considerably improved if (i) the banking sector’s nonperforming assets (NPAs) are resolved more quickly and efficiently; (ii) recapitalisation of the banking sector is hastened; and, (iii) the formula for adjustments in the interest rates on small savings schemes to changes in yields on government securities of corresponding maturity is fully implemented," the statement from the RBI said.
It expects growth to recover sharply in 2017-18 on account of several factors. It sees the discretionary consumer demand, which had seen a slowdown after the demonetisation, to bounce back towards the close of the current year.
The central bank sees rapid restoration of the economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector.
The demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers. This should spur a pick-up in both consumption and investment demand, the RBI said in its policy.
Premature action (rate cut) at this stage risks disruptive policy reversals later and the loss of credibility, said the monetary policy committee
The RBI's workings have become all the more opaque at a time when it should be more transparent; will Urjit Patel try to salvage the image of a democratic institution that plays a key role in the economy
Poll of nearly 60 economists found that the RBI's recently formed Monetary Policy Committee will cut the repo rate by 25 bps to 6 percent to boost growth