Nobody expected the Reserve Bank of India (RBI) to cut its policy rate or even tinker with the liquidity measures in its bi-monthly monetary policy review on Tuesday. To that extent, there is no shock or surprise. However, those analysts who were betting on a rate cut by the Indian central bank in August, at the next bimonthly review, are a disappointed lot. Even though the stance of the monetary policy remains “accommodative”, any rate action in August is ruled out.
It is also highly unlikely even in October’s policy review. After paring the policy rate by 150 basis points between January 2015 and April 2016 to fight firmly entrenched inflation in Asia’s third largest economy, RBI governor Raghuram Rajan has pressed the pause button. It will be a long pause.
One basis point is one-hundredth of a percentage point.
As expected, the policy rate remains unchanged at 6.5%. So does the banks’ cash reserve ratio or the portion of deposits that commercial banks need to keep with RBI (at 4% of their deposits).
In April, RBI had cut its policy rate by 25 basis points and signalled a shift in its stance on liquidity management from a banking system with a 1% deficit of bank deposits to a position “closer to neutrality”.
As a result of this, the average daily net liquidity injection by RBI into Indian banking system has come down from Rs.1,935 billion in March to Rs.1,030 billion during April-May and Rs.120 billion in the first few days of June.
Retail inflation, which was in sync with RBI’s projections till March, surged in April to 5.4% from 4.8% in the previous month, driven primarily by food inflation, even as core inflation, or non-food, non-oil, manufacturing inflation, remained relatively steady. Wholesale inflation was 0.3% in April, after being in negative territory for 18 months. Reflecting the recent inflation dynamics, three-months-ahead inflation expectations of households moved up marginally in May.
“The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” says RBI, even though it has not changed its January 2017 inflation projection at 5%, adding an “upside bias”. A normal monsoon—which is widely expected after two years of insufficient rainfall—may tame food inflation but upside risks emanate from other factors as well, including rising international commodity prices, particularly of crude oil, and the implementation of the Seventh Central Pay Commission awards.
In the April policy statement, RBI had said that it would watch macroeconomic and financial developments in the months ahead with a view to responding as space opens up. This holds true even now, but uncertainties about opening up the space are far higher now than they were in April.
Clearly, the focus remains on better transmission of the monetary policy.
The introduction of marginal cost-based loan rate in April from the base rate or minimum lending rate, based on average cost of funds, has been slow. RBI will review the new system to speed up the transmission, which is critical for revival of growth.
Even if there is no rate cut by the banking regulator during this calendar year, there is scope of banks’ loan rate coming down by around 50 basis points from the current level once the cloud over their redemptions of overseas deposits raised in 2013 is cleared.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Comments are welcome at firstname.lastname@example.org. His Twitter handle is @tamalbandyo.