RBI monetary policy: Five things to watch out for

Mumbai: By virtue of being the first monetary policy of this financial year, the upcoming announcement of the Reserve Bank of India (RBI) will be a signal of the way the central bank views various macroeconomic parameters and the pace at which it expects the gross domestic product (GDP) growth to come back.

While a majority of the economists surveyed by Mint expect the RBI to hold the repo rate at 6.25% and continue with its neutral stance, they also expect more announcements around excess liquidity.

Here are five things that might be on the radar of the monetary policy committee:

Growth: Ever since demonetisation took away the buying power of a large number of people, there have been concerns around the impact it could have on growth numbers for financial years 2016-17 and 2017-18.

The RBI itself had revised its GDP growth expectations in February, when it said that the expected rate of growth for financial year ending March 2017 would be 6.9%, as opposed to 7.1% earlier, owing to demonetisation.

For the new financial year, the RBI has estimated a growth rate of 7.4%, which is only 50 basis points (bps) higher than what it had estimated earlier, despite the central bank expecting a bounceback in growth as the impact of demonetisation wears off. In the last policy, the regulator had adopted a neutral stance due to hardening inflation numbers, which may make rooting for fast-paced growth a little difficult.

Inflation: The banking sector regulator’s change in stance in the last monetary policy announcement came as a surprise to many who felt that it was being needlessly hawkish. However, wholesale inflation soared to a 39-month high of 6.55% in February, while retail inflation inched up to 3.65% due to rise in food and fuel prices, signalling that hardening inflation rate was still a legitimate concern for the regulator.

It is unlikely that the RBI would change its stance in just two months. However, since this year is expected to be about economic growth and a bounceback in general, it would be interesting to note the central bank’s commentary around how it would balance its monetary policy around this.

Excess liquidity: The banking sector regulator is widely expected to announce special measures to take out the additional liquidity in the system to further support its neutral stance on interest rates. The excess liquidity which entered the banking system due to large amount of deposits by the people during the two months of demonetisation has still been lying around in bank accounts as the restrictions on withdrawals were only removed recently. Moreover, as banks struggle with lack of credit growth, they will need to find avenues to deploy the liquidity available with them.

Clarity around deposits: The RBI is yet to give a clear picture on the amount of deposits that have returned to the banking system owing to demonetisation in November and December. While it has been three months since the regulator closed the window to deposit the old Rs500 and Rs1,000 currency notes for most people, it has always maintained that collection of data was still work in progress.

Once it clarifies the amount of currency notes that has returned into the system and the level of new currency notes pumped in, market watchers would be able to determine the true level of remonetisation in the economy.

Bad loans: Over the last few weeks, the government, the RBI and chiefs of large banks have had multiple meetings to discuss ways and means to deal with the stressed loan situation in the Indian banking system. The high level of bad loans in the public sector banking space and low credit growth has resulted in many banks fully focussing their efforts on recovery of bad loans, rather than growing their business.

The RBI is expected to make some announcements around a new scheme around dealing with bad loans or introduce some vital changes into the scheme for sustainable structuring of stressed assets (S4A) and strategic debt restructuring (SDR) scheme.