RBI leaves key rates unchanged, passes economic revival buck to … · 2017-12-07 · 12/7/2017 RBI leaves key rates unchanged, passes economic revival buck to Centre ... 12/7/2017

12/7/2017 RBI leaves key rates unchanged, passes economic revival buck to Centre - The Financial Express

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RBI leaves key rates unchanged, passes economic revivalbuck to CentreBy: FE Bureau | Mumbai | Updated: December 7, 2017 6:40 AM

Wednesday’s unsurprising Reserve Bank of India

(RBI) decision to leave its policy rate and neutral

stance unchanged while mildly raising its inflation

Holds on policy rate, ups inflation outlook; with finmin, to offer a ‘reform and recap package’ for PSBs. (IEimage)

The first Tata Motors

Tigor electric vehicle

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forecast for the second half of this fiscal has put the

task of spurring the economic recovery, of which

there is scant evidence so far, more in the hands of a

fiscally stressed government. Announcing the

Monetary Policy Committee’s decision to keep the

repo rate at 6% in the wake of a “sharp uptick in

momentum” of retail inflation, RBI governor Urjit Patel said: “We have a neutral stance,

which means that depending on the data flow (on growth/inflation) in the coming

months and quarters (we) will determine…the policy.” Most analysts saw no change in

the February review either, even though the MPC’s commentary was less hawkish than

bond markets expected — it said risk to inflation are “evenly balanced”. The yield on the

benchmark 10-year bond fell 3 basis points on Wednesday to 7.03%. For the RBI’s

projection of 6.7% gross value added (GVA) growth — which it maintained in the latest

bi-monthly review despite Q2 expansion coming in lower than projected in the October

review — to pan out, expansion should be close to 7.6% in the second half, an

assumption many analysts find a bit exaggerated. Listing out near-term factors like HRA

to government staff and global oil prices that will influence inflation, the MPC said, “On

the whole, inflation is estimated in the range of 4.3-4.7% in Q3 and Q4 of this year,”

against an average 4.2-4.6% in the October review.

The finance ministry, which would clearly

have liked a rate cut, said: “The MPC

recognised that inflation remains firmly

under control, retaining its inflation

projection for the second half of FY 2018 and

assessing that the risks to this projection are

evenly balanced. For that reason, it has

maintained a neutral policy stance.”

Although the surplus liquidity in the system

continued to decline in October-November,

the MPC did not cut the cash reserve ratio

either — Patel said there wasn’t any drying

rolls out from Sanand

Magnitude 5.1

earthquake jolts Jammu

and Kashmir, no

casualties reported

Budget 2018: Industry representatives want lower corporate tax from FM Arun Jaitley

http://www.financialexpress.com/industry/the-first-tata-motors-tigor-electric-vehicle-rolls-out-from-sanand/964158/http://www.financialexpress.com/india-news/magnitude-5-1-earthqake-jolts-jammu-and-kashmir-no-casualties-reported/964285/http://www.financialexpress.com/budget/budget-2018-industry-representatives-want-lower-corporate-tax-from-fm-arun-jaitley/964163/http://www.financialexpress.com/



out of liquidity yet while deputy governor Viral Acharya saw “slightly surplus” liquidity

by March. The surplus in the reverse repo markets is currently hovering above Rs 1 lakh

crore and analysts don’t expect the central bank to persist with aggressive open market

debt sales to drain out cash. The MPC saw a few factors that it believes augurs well for

growth: An increase in capital raised from the primary market, which bucked a trend of

sluggishness of the past several years; the likely enhancement of “allocative efficiency”

after large stressed borrowers are referenced to insolvency resolution process and

public sector banks’ recapitalisation. Stressing that public sector banks (PSBs) are

offered “a reform and recap package” rather than a mere recap package that could sow

the seeds of “another boom and bust cycle of lending”, Patel said the RBI was working

with the department of financial services in the finance ministry to determine the

amount of recapitalisation bonds to be placed on each PSB’s balance sheet and the

component of external fund-raising. “Recapitalisation bonds will be front-loaded for

banks that have managed their balance sheet strength more prudently and can use the

injected capital to lend besides providing for legacy asset losses,” the governor said. The

banks, he asserted, would receive government equity contribution based on their

“resolve and progress” towards reforms in a significant and time-bound manner and

become “slim and trim” by implementing better-focused strategies and selling non-core

assets.

According to Patel, the MPC did not consider shifting the stance because nothing

between October to December was significant in terms of the macro outcome that would

warrant it. “Moderation in inflation excluding food and fuel observed in Q1 of 2017-18

has, by and large, reversed. There is a risk that this upward trajectory may continue in

the near term,” he said. The central bank also cautioned that farm loan waivers by select

states, partial roll-back of excise duty and value-added tax in the case of petroleum

products, along with a decrease in revenue on account of reduction in goods and

services tax (GST) rates for several goods and services may result in fiscal slippage with

attendant implications for inflation. Following the MPC decision, rating agency Crisil

maintained its inflation forecast for FY18 at an average of 4%. “… there could be room

for a rate cut if the downside risks to growth materialise, and inflation undershoots the

MPC’s growth forecast for the second half. The base case scenario is of MPC staying on

hold this fiscal.” Sonal Varma, MD and chief economist at Nomura, said both growth and



inflation are headed higher, but she expects rates to be on hold through 2018 as the RBI

has a sufficient real rate cushion to absorb higher inflation. “Although there could be

some downside risk to the RBI’s FY18 GVA growth projection, we believe that growth is

headed higher, supported by ongoing remonetisation, resolution of GST-related issues

and large bank recapitalisation,” Varma wrote. “Inflation will range between 4-4.5% for

the rest of the year and hence we would rule out any rate cut this financial year,” CARE

Ratings said. “Our GDP growth estimate is 6.7-6.8% which will be slightly lower than RBI

implied GDP growth rate of 6.8-6.9% (given differential of 0.2% between GDP and GVA).”

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RBI leaves key rates unchanged, passes economic revival buck to … · 2017-12-07 · 12/7/2017 RBI leaves key rates unchanged, passes economic revival buck to Centre ... 12/7/2017