RBI keeps repo rate steady at 6.25%, doesn't want to risk 'loss of credibility'

The Monetary Policy Committee has kept the Reserve Bank of India's policy rates steady, but cut statutory liquidity ratio of banks by 50 basis points and also the inflation target. The repo rate is 6.25 percent and the SLR after the cut stands at 20 percent. "If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5 percent in the first half of the year and 3.5-4.5 percent in the second half," the MPC statement said.[caption id="attachment_3526953" align="alignleft" width="380"] Reuters[/caption]The panel also noted that incoming data suggest that the transitory effects of demonetisation have lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits and vegetables, pulses and cereals."At the same time, however, the CSO’s latest releases on national income accounts and industrial production attest to the effects of demonetisation on the broader economy being sector specific and transient, as well as to the noteworthy resilience of private consumption. At this stage, it is difficult to isolate these factors or to judge the strength of their persistence. As the year progresses, underlying inflation pressures, especially input costs, wages and imported inflation, will have to be closely and continuously monitored," the statement said.The panel also said it is focused on its commitment to keeping headline inflation close to 4 percent on a durable basis keeping in mind the output gap."The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place. Premature action at this stage risks disruptive policy reversals later and the loss of credibility," the statement said.Statutory Liquidity Ratio (SLR) or the percentage of deposits that banks have to park in government securities, by 0.5 per cent to 20.5 percent, a move that would result increased lending by banks.The statement has raised concerns over fiscal slippages in view of rush for farm loan waivers."The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers," it said.The panel also cut the economic growth projection to 7.3 percent for the current fiscal from 7.4 percent earlier."With the CSO’s provisional estimates for 2016-17, the projection of real GVA growth for2017-18 has accordingly been revised 10 bps downwards from the April 2017 projection to 7.3per cent, with risks evenly balanced," it said.Listing out the growth inducing factors, the panel pointed to the continuing remonetisation and the reductions in banks’ lending rates post-demonetisation, It hopes the remonetisation should enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy. The rate cuts by banks will also support both consumption and investment demand of households and stress-free corporates. The robust government spending is also cushioning the impact of a slowdown in other constituents.However, there are three risks to growth: 1) global political developments; 2) rising input costs and wage pressures that prove a drag on the profitability of firms and pulling down overall GVA growth and 3) the twin balance sheet problem - over-leveraged corporate sector and stressed banking sector - may delay the revival in private investment demand.