04 October, Mumbai
Belying industry expectations, RBI maintained its hawkish stand on Wednesday refusing to cut rates in view of the rising inflationary pressure and concerns over “fiscal slippage”.
Holding its key interest rate unchanged at 6 per cent, the central bank, however, eased liquidity constraints while lowering growth projection which were pulled down by the troubled implementation of the Goods & Services Tax and loss of consumer and business confidence.
According to the Reserve Bank of India’s fourth bi-monthly monetary policy review of 2017-18, the repurchase rate, or the short-term lending rate for commercial banks on loans taken from it, has been maintained at 6 per cent.
Consequent to the decision to maintain the repo rate, the reverse repo rate remained at 5.75 per cent.
The decision was taken by the six-member MPC headed by RBI Governor Urjit R. Patel. Five members of the panel voted in favour of maintaining the key lending rate.
While the government was non-committal in its reaction, India Inc. expressed its disappointment over the RBI’s refusal to cut rates.
At its last policy review in August, the central bank had reduced its repo rate by 25 basis points (bps) to 6 per cent from 6.25 per cent.
“The MPC observed that CPI inflation has risen by around two percentage points since its last meeting… Such juxtaposition of risks to inflation needs to be carefully managed,” the fourth bi-monthly monetary policy statement said.
“Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil. The possibility of fiscal slippages may add to this momentum in the future.”
However, to induce liquidity into the system, the RBI reduced the Statutory Liquidity Ratio (SLR) — a reserve requirement that commercial banks must maintain — by 50 basis points to 19.5 per cent from October 15.
On the other hand, RBI lowered the country’s growth projection for 2017-18, pegging the Gross Value Added (GVA) to 6.7 per cent from earlier estimate of 7.3 per cent.
Meanwhile, the equity markets, which had already discounted any further reduction in key lending rates, made gains due to healthy demand for banking stocks after announcement of SLR cut.
The key indices also rose on the back of positive global cues and value buying.
The wider Nifty50 of the National Stock Exchange (NSE) rose by 55.40 points, or 0.56 per cent, to 9,914.90 points.
The 30-scrip Sensitive Index (Sensex) of the BSE, which opened at 31,522.17 points, closed at 31,671.71 points — up 174.33 points, or 0.55 per cent.
The S&P BSE banking index rose by 0.17 per cent to close at 27,126.98 points.
The Ministry of Finance said: “We have noted that this decision has been made by the MPC in light of the underlying analysis which implies: a downward revision of the real GVA growth forecast… a marginally upward revision of the CPI inflation forecast for the second half of the year meaning an average inflation for the year 2017-18 as a whole of less than 4 percent.”
On its part, India Inc. expressed its disappointment over the decision to maintain its key lending rates.
“Ficci is disappointed that the MPC has chosen to hold the repo rate and not reduce it… In the context of current industrial situation, we felt that there was a need for a further cut in the repo rate,” said Pankaj Patel, President of the Federation of Indian Chambers of Commerce and Industry (Ficci).
“Growth conditions remain under strain which is reflected in the persistently weak investment activity and the first quarter GDP growth numbers. While RBI in the policy statement cites inflationary pressures to remain a concern, Ficci feels that we need to give equal consideration to growth prospects.”
Gopal Jiwarajka, President, PHD Chamber of Commerce and Industry, said: “Although a repo rate cut was expected from RBI, a 50 basis points cut in SLR (statutory liquidity ratio) is welcome and is expected to enhance banking sector liquidity in the coming times.”
Assocham President Sandeep Jajodia said: “What is not so pleasant is the fact that the credit policy does not give any indication of a rate cut even in the short to medium term, so the ball for growth revival is now completely in the court of the government through fiscal measures.”
For Chanda Kochhar, Managing Director and Chief Executive Officer, ICICI Bank, the RBI’s announcement to keep the policy rate unchanged was along expected lines.
“The MPC has not viewed the recent growth slowdown as being structural in nature and is expecting it to be transient with growth prospects likely to improve over the medium term,” said Kochhar.