Those who are well aware of the inflation hawk approach of a central bank, particularly of Reserve Bank of India, did not think that there would be any change in the policy rates, believes Deepak Talwar, Principal of DTA Consulting. Yet, many were hoping that RBI might change its stance and concede to lower the cost of funds for Indian business. They had good reasons for the same.
First retail inflation (measured by Consumer Price Index – CPI) fell to a new record low of 2.99% in April from a nearly five-month high of 3.89% in March. This was due to a lower base effect and also lower food prices. This softening of the inflation rate, coupled with the slowdown in GDP growth rate in the 4th quarter of 2016-17 to 6.1%, led many to hope that RBI would like to infuse growth.
“When the suggested meeting between the members of the monetary policy committee (MPC) and finance ministry officials did not take place, we knew that RBI would not change its stance”, said Deepak Talwar. According to Talwar, the Indian central bank had made up its mind to continue with unchanged policy rates. In the scheduled press conference after the announcement of the monetary policy, the RBI Governor said that the members of the MPC had declined to meet the Chief Economic Advisor and the Secretary Economic Affairs before the announcement of policy rates. This indicates that the members had a rigid view on policy rates and did not want to listen to the Government’s views. There was, however, one dissenting vote in the six-member MPC, indicating that maintenance of status quo was not the unanimous choice.
While the policy rates remained unchanged, RBI conceded that on the inflation front the economy had been faring comfortably. In its assessment for the year, RBI projected headline inflation at 2.0-3.5% in the first half of the year and 3.5-4.5% in the second half. Talwar felt that this was an indication that the RBI would probably be accommodative on the future course of rates in a bid to revive economic growth. RBI reduced its growth projection by 10 basis points to 7.3% in the current fiscal.
Meanwhile, the MPC of RBI decided to wait for the two possible upside risks on price line. The Government would be releasing arrear allowances of the Seventh Pay Commission which would put pressure on inflation. In addition, given the current global political economic conditions, India might face the problem of imported inflation. The impact of GST, RBI felt, would not be inflationary. Monsoon seems to be good this year again. “Yet, RBI decided to maintain unchanged policy rates, leading many of us to wait for the next policy review two months hence”, said Talwar.
There were certain technical changes announced by RBI. The Statutory Liquidity Ratio (SLR) was reduced by 50 basis points to 20% of NDTL (net demand and time liabilities – deposits) with effect from the fortnight beginning June 24, 2017. RBI felt that this would give banks greater flexibility to meet the minimum LCR (Liquidity Coverage Ratio) with effect from the beginning of the calendar year of 2019.
RBI also relaxed norms on housing loans. Considering the importance of the housing sector and given its forward and backward linkages to the economy, RBI reduced the risk weight on certain categories of housing loans sanctioned from June 7. RBI also reduced the standard asset provisioning rate on such loans.
But the restriction imposed on the issuance of rupee-denominated bonds abroad (Masala Bonds) would create a queue in RBI. Masala bonds would require permission from RBI before issuance. On the issue of NPAs, RBI clarified its PCA (Prompt Corrective Action) framework, reiterating that this had been in operation since 2002 and is meant to assist bank management in maintaining caution.
On the whole, the 2nd bi-annual monetary policy was not encouraging for corporate India looking desperately for lower cost of funds.