RBI policy meeting highlights: MPC maintains status quo

■ MPC keeps repo rate— the rate which RBI lends to commercial banks—unchanged at 6.5%. Consequently, the central bank held the reverse repo rate at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. Read more■ The six-member monetary policy committee (MPC) voted unanimously to keep the repo rate at 6.5%, but voted 5-1 in favour of maintaining the policy stance as “calibrated tightening”. Among the MPC members, Ravindra Dholakia—known for his dovish stance—voted to change the stance to neutral.■ RBI lowered retail inflation projection in the range of 2.7-3.2% for the second half of 2018-19, citing normal monsoon and moderate food prices. For H1 of 2019-20, RBI projected inflation at 3.8-4.2%, with risks tilted to the upside. Read more■ The panel retained its GDP growth estimate for the current year at 7.4%. For the next fiscal, RBI projected growth rate at 7.5%.■ Starting in the January-March quarter, banks’ mandatory bond holding ratios will be reduced by 25 basis points each quarter until it reaches 18% of deposits, in a move aimed to push banks to lend more. The current SLR is 19.5%.■ The RBI has mandated banks to use external benchmarks for their floating rate loans instead of the present system of internal benchmarks. The RBI will release final guidelines for new pricing of loans by the end of December 2018. Read more■ The minutes of the MPC’s meeting will be published by December 19. The next meeting of the MPC is scheduled from February 5 to 7, 2019.

Reserve Bank Governor Urjit Patel Wednesday refused comments on the friction with the government, including the invocation of the never-before-used Section 7 or the proposed economic capital framework for the central bank. Speaking at the customary post-policy resser after the fifth bi-monthly policy review, wherein the policy rates were left unchanged, Patel parried three questions on these issues.“I would avoid those questions because we are here discussing the monetary policy resolution,” the Governor said.Another questions seeking his views on deputy governor Viral Acharya’s public posturing on RBI autonomy and on the economic capital management framework were also met with similar replies.“Is this related to the MPC resolution? I don’t think so. We are here to discuss the MPC resolution and the macroeconomy,” said Patel, who was facing the press for the first time since the issues came out into the open in October.

“Given the assessment that growth will likely remain healthy for the rest of the year, the MPC (monetary policy committee) retained its stance at calibrated tightening so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals,” Patel said. “If the upside risks we have flagged do not materialise or are muted in their impact as reflected in incoming data there is a possibility of space opening up for commensurate policy actions by the MPC.”

To improve transparency of how banks price their home and auto loan rates, the RBI has mandated the use of external benchmarks for their floating rate loans instead of the present system of internal benchmarks. The new guidelines for pricing of loans are applicable for new floating rate personal or retail loans (housing, auto) and floating rate loans to micro and small enterprises extended by banks from April 1, 2019. The RBI will release final guidelines for new pricing of loans by the end of December 2018. Read more

Aurodeep Nandi, India economist, Nomura Financial Advisory & Securities (india), Mumbai: “We believe that the RBI is likely to change stance to ‘neutral’ in early 2019. We perceive that India is slowly entering into a low inflation, slowing growth quadrant. We could possibly see growth slowing down from here to even clocking below 7 pct by Q4 FY 19, with headline inflation remaining capped on the back of low food inflation, and reducing core momentum. Our base case remains of a prolonged pause on repo rate.”Shashank Mendiratta, India Economist, ANZ Bank, Bangalore: “We might see the central bank change its stance to ‘neutral’ from ‘calibrated tightening’ in February. The RBI will definitely keep rates on hold for another 2-3 quarters, with the expectation that inflation will remain below 4 percent over the next 3-4 quarters, provided oil prices remain at current levels. RBI’s policy seems to be for a long pause at the moment. The issue they are focusing now is the sticky core inflation.”“Liquidity in the banking system has been almost persistently in deficit over the past few weeks. I think the RBI will step up open market operation purchases, and there needs to be some more liquidity injection by the RBI to support growth.”Dhananjay Sinha, Head Of Institutional Research, Emkay Global Financial Services Ltd, Mumbai: “When the headline numbers are being brought down, they (RBI) are looking for a scenario where the core inflation could actually remain high. Effectively, I think they will remain on hold for next three-four months before things get clearer. I think currency depreciation is definitely a worry, apart from volatility in crude prices. These are the factors that can actually change RBI’s projection in terms of inflation.”Abhimanyu Sofat, head of research at IIFL Securities Ltd: “No major decision on liquidity won’t have a large bearing on the market as the economy continues to benefit from the sharp fall in crude oil prices. The liquidity situation for the non-bank finance companies has already begun improving and we are seeing large companies are able to rollover their loans.” (Agencies)

All six members of the monetary policy committee voted to keep the policy rate unchanged. However, Ravindra H. Dholakia voted to change the stance to neutral.

The central bank said starting in the January-March quarter of 2019 it would begin to lower banks’ mandatory bond holding ratios by 25 basis points each quarter until it reaches 18% of deposits, in a move aimed to push banks to lend more.

The BSE Sensex traded 297.48 points, or 0.82%, down at 35,836.83, and the Nifty 50 fell 99.65 points, or 0.92%, to 10,739.85.

The MPC retained the gross domestic product (GDP) estimate for the current year at 7.4%, with the growth rate of 7.2%-7.3% in the second half of 2018-19. The panel projected FY20 GDP growth to be 7.5%.

Taking into account the fall in food inflation, crude oil prices and an appreciating rupee, the MPC lowered its inflation projection sharply to 2.7-3.2% from 3.9-4.5% for the second half of the current fiscal year. It expects inflation to rise to 3.8-4.2% in the first half of 2019-20.Despite the revision in inflation projection, the MPC flagged risks to the inflation outlook. “Although recent food inflation prints have surprised on the downside and prices of petroleum products have softened considerably, it is important to monitor their evolution closely and allow heightened short-term uncertainties to be resolved by incoming data,” said the policy statement.

As widely expected, the monetary policy committee of Reserve Bank of India (RBI) today kept its repo rate, or the at which central bank lends money to the banks for the short term, unchanged at 6.5%. Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

The BSE Sensex traded 219.69 points, or 0.61%, down at 35,914.62, and the Nifty 50 fell 76.20 points, or 0.70%, to 10,793.30. The BSE MidCap and SmallCap indices were down 1.04% and 1.07%, respectively. All the sectoral indices on BSE traded lower with basic materials, power and auto falling most at nearly 2%.

Since the last policy, when the central bank surprised the market by keeping rates on hold, crude oil prices have slipped below $60/bbl and retail inflation has eased to a 13-month low of 3.31%, below the medium-term inflation target of 4% for the third straight month. A subdued inflation reading on account of falling food prices is likely to translate into lower incomes for farmers, which in turn could be a drag on economic growth.Liquidity in the financial system has declined, forcing lenders to raise rates. Some of the reasons include sales tax payments to the government, a seasonal pick-up in loans and intervention by the central bank in the foreign-exchange market to prop up the rupee.Growth has slowed to 7.1% in the September quarter and factory output measured by the index of industrial production to 4.5%, giving enough reasons for the central bank to deliver a status quo policy this time.

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to keep policy rates on hold on Wednesday, amid falling crude prices, lower-than-expected food prices and moderation in economic growth, according to treasury heads of 10 banks surveyed by Mint. On inflation, the treasurers expect RBI to revise the inflation trajectory downward by an additional 10-20 basis points. Some participants expect RBI to either cut the cash reserve ratio or relax the statutory liquidity ratio (SLR) to ease the liquidity situation.