Money & Banking

Need to monitor inflation closely: RBI

Our Bureau Mumbai | Updated on January 15, 2018 Published on April 06, 2017

RBI Governor Urjit Patel at a press conference on Thursday. - PAUL NORONHA

Uncertainty over the monsoon, effects of GST among challenges

The Reserve Bank of India, as was widely expected, decided to keep its policy rate on hold in its first bi-monthly monetary policy review for 2017-18, citing challenging inflation outlook.

This is the third successive quarterly review that the central bank has kept its policy rate unchanged at 6.25 per cent.

Even as it maintained status quo on the policy rate, which is the interest rate at which it provides liquidity to banks to overcome short-term liquidity mismatches, the central bank provided greater clarity about liquidity management. It said surplus liquidity was being drained out.

All six members of the monetary policy committee voted in favour of the monetary policy decision.

This is also in keeping with the central bank’s neutral policy stance to achieve the medium-term target for Consumer Price Index (CPI) inflation of 4 per cent, with an upper and lower tolerance level of 6 per cent and 2 per cent, respectively, while supporting growth, the RBI said.

For 2017-18, the RBI has projected inflation to average 4.5 per cent in the first half of the year and 5 per cent in the second half, with risks evenly balanced around the inflation trajectory at the current juncture.

Upside risks

However, the central bank said there are upside risks — the path of food inflation may be impacted by the outcome of the monsoon in the coming year, implementation of the allowances recommended by the 7th Central Pay Commission, one-off effects of the Goods and Services Tax — to the baseline projection.

According to the committee’s resolution, while inflation has ticked up in its latest reading, its path through 2017-18 appears uneven and challenged by upside risks and unfavourable base effects towards the second half of the year.

“Moreover, underlying inflation pressures persist, especially in the prices of services. Input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve.

“Accordingly, inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored,” said the resolution. RBI Governor Urjit Patel said, “The committee took note of the reduction in bank lending rates, although further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates.

“In its opinion, along with rebalancing liquidity conditions, it will be the Reserve Bank’s endeavour to put the resolution of banks’ stressed assets on a firm footing and create congenial conditions for bank credit to revive and flow to productive sectors of the economy.”

With banks reeling under a surfeit of liquidity following demonetisation and lack of credit demand, they have already cut deposit and lending rates and are unlikely to change the rates any further.

Policy transmission

To ensure better monetary policy transmission, the RBI narrowed the policy rate corridor — reverse repo rate (increased to 6 per cent from 5.75 per cent) — repo rate (6.25 per cent) — marginal standing facility (down to 6.50 per cent from 6.75 per cent).

Under the reverse repo, banks park surplus liquidity with the RBI. Under the marginal standing facility, banks draw emergency funds from the RBI over and above the repo requirement.

Arundhati Bhattacharya, Chairman, State Bank of India, said: “The RBI policy to keep the repo rate on hold was on expected lines, even though reverse repo rate was hiked to 6 per cent. ”

Published on April 06, 2017
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