By Apoorva Mandhani
The Reserve Bank of India, in its 6th bi-monthly policy review meeting for FY17, retained key interest rates under the Liquidity Adjustment Facility (LAF). The policy repo rate thus remains unchanged at 6.25%. Consequently, the reverse repo rate remains unchanged at 5.75%. The marginal standing facility rate and the bank rate both remain steady at 6.75%. The RBI also changed its stance from accommodative to neutral.
Analysts critical, but short-term stability important
[su_pullquote]Market players opine that a rate cut could have assisted borrowers in a significant way.[/su_pullquote]
This is the second time in a row that the RBI has held rates. The concern over inflation is being pegged as a key driver behind the decision. Expectedly, the stance has been censured. Market players opine that a rate cut could have assisted borrowers in a significant way. This arises from the fact that the banks currently hold high liquidity. It is being propounded that a rate cut was necessary for bringing demand back in the system. Since demonetization, banks have gained stronger credit. A rate cut would have allowed the banks to pass the benefits to the borrowers, where reduced EMIs could have swung the demand upwards in the property market.
Such disappointment, however, disregards the possibility that the RBI might have touched the bottom of its interest rate cycle. If this is the case, further cuts are not on the cards, at least until the end of this year. Further, Mr Rajesh Goyal, Vice President – CREDAI, Western U.P. & MD – RG Group, was of the view that fresh home loan borrowers may still witness lowered EMIs. He attributed this to the intensifying competition among the lenders, because of which the banks might be forced to start cutting down the interest rates themselves.
Therefore, in view of the improved system liquidity, RBIs focus is to restore the short-term disruptions due to demonetisation, rather than lowering the rates.
Changing the outlook: What does being ‘neutral’ mean?
The RBI has changed its stance from accommodative to neutral. The policy rate was kept on hold in order to:
[su_quote]Assess how the transitory effects of demonetization on inflation and the output gap play out.[/su_quote]
For several reasons, this change is surprising for the close market watchers. Top bankers feel that the shift in RBIs monetary policy stance reduces the scope for future rate cuts. The stance is also reflective of the RBIs desire to focus on inflation and move decisively towards the 4% target.
The arrival of Donald Trump on the world stage has not left untouched the Indian economic policy. | Image courtesy: Visual HuntExceeding the 4% target in the medium term is also raising concerns. Several factors like the hardening of global fuel prices (which analysts do not expect to soften), volatile exchange rate movements (partly caused by an unpredictable Donald Trump administration), and delayed implementation of the Seventh Pay Commission are possibly at play here.
A change in stance can, hence, be viewed as being based on a judicious assessment of risks going forward.
It is also indicative of the Central Banks belief that, from a policy perspective, the ideal interest rate levels have been reached. The RBI depends on the banks to ensure better transmission of its objective of lower interest rate in the system. Further, the RBI statement displays consolidation with the Budget, which had emphasised fiscal discipline.
With this policy, the RBI has supposedly gone into observer mode. This seems just about right, given that further rate cuts depend on data points, both domestically and globally.