India: RBI leaves key rates unchanged, passes economic revival buck to Centre

  • The unsurprising Reserve Bank of India (RBI) decision on 6 Dec 17 to leave its policy rate and neutral stance unchanged while mildly raising its inflation forecast 2HFY18 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.”
  • For the RBI’s projection of 6.7% gross value added (GVA) growth – which it maintained in the latest bi-monthly review despite 3Q17 expansion coming in lower than projected in the Oct 17 review — to pan out, expansion should be close to 7.6% in the 2HFY18 (4Q17 – 1Q18), 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 4Q17 and 1Q18,” against an average 4.2-4.6% in the Oct 17.
  • 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 Oct 17-Nov 17, the MPC did not cut the cash reserve ratio either — Patel said there wasn’t any drying out of liquidity yet while deputy governor Viral Acharya saw “slightly surplus” liquidity by Mar 17.
  • The surplus in the reverse repo markets is currently hovering above INR1tr 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.

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