The Reserve Bank of India (RBI) on Tuesday held interest rates steady to guard against an uptick in consumer inflation and nudged lenders to pass on to consumers the full benefit of its four previous rate cuts this year.
The central bank kept the repo rate, its main lending rate, at 6.75 per cent in its bi-monthly policy review. The move was widely expected after the RBI slashed the repo rate by 125 basis points this year, including a deeper-than-expected cut of 50 basis points two months ago.
The policy focus was more towards transmitting the rate cuts to consumers. Banks have only transferred half of the cut to consumers even though the RBI has repeatedly stressed on lenders trimming rates to improve credit growth.
The RBI also kept unchanged the statutory liquidity ratio (SLR) and cash reserve ratio (CRR). SLR is the reserve requirement that commercial banks must maintain in the form of cash, gold or government-approved securities before providing credit to the customers. CRR is the amount of cash banks have to keep with RBI.
Growth outlook unchanged
There was no change to growth and inflation projections. While the RBI maintained that weak global cues can weigh on the domestic economy and trade, the bank retained the 7.4 per cent projection for the current fiscal year with a mild downward bias.
The bank had, in its September meeting, cut the growth projection to 7.4 per cent from 7.6 per cent. Although the RBI is maintaining a downward bias on its projection, the finance ministry in a press note released today said it expects the economy to grow in the vicinity of 7.5 per cent.
Data released on Monday showed the economy grew 7.4 per cent in the July-September period, accelerating from 7.1 per cent in the previous three months.
On inflation, the central bank retained its target of 6 per cent by January 2016. It has set a target of 5 per cent by March 2017. Data released earlier this month showed consumer inflation accelerated to a four-month high of 5 per cent in October.
“Inflation has turned up as anticipated, and is expected to rise further until December before plateauing. Although the seasonal moderation in prices of vegetables and fruits is expected to provide some respite, the El Nino induced shortening of winter may limit this effect,” the RBI said.
Pay panel’s impact
An important point in the policy review was the likely impact of the seventh pay commission on government finances. The commission has recommended a hike of 23.5 per cent in wages and pensions of close to 50 lakh central government employees.
“The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path,” the RBI said.
The central bank said it will look for more cues on the fiscal side before deciding on more rate cuts. Another event that markets would be keenly watching is US Federal Reserve’s decision on interest rates will also be keenly watched. With the Fed all set to hike rates in its December policy after a nine-year hiatus, the RBI will also be wary of safe-haven demand and the impact on the rupee.
Atsi Sheth, associate managing director for sovereign risk group at Moody’s Investors Service, said the RBI’s reference to the front-loading of monetary policy easing and to incipient inflationary pressures suggests that the central bank’s future policy decisions will be guided by its view on growth and inflation impact of the implementation of the Pay Commission’s recommendations as well as by fiscal policy and structural reform measures.
“If government policies in coming months are skewed towards promoting growth via stimulating demand (and consequently stoking inflation), the prospects of significant monetary easing will be reduced,” she said. “Alternatively, if government measures aim at reviving private investment via reduction in supply bottlenecks, and inflationary expectations remain contained amid still subdued domestic demand trends, further monetary easing is likely.”