Money & Banking

RBI keeps repo rate on hold, shifts focus to excess liquidity

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

RBI Governor Urjit Patel and Deputy Governor SS Mundra at a pressbriefing on the Monetary Policy, in Mumbai, on Thursday - Photo: Paul Noronha

A file photo of RBI governor Urjit Patel

Raises reverse repo rate by 25 bps;Patel says taxpayers end up paying for loan waivers

The Reserve Bank of India (RBI) decided to keep its policy rate on hold in its first bi-monthly monetary policy review for 2017-18, on Thursday, citing the challenging inflation outlook.

The apex bank, however, proposed a mechanism to resolve the weakest bank balance sheets under a revised ‘prompt corrective action’ framework.

The central bank also allowed banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in a bid to spur investments in core infrastructure sectors.

The RBI’s stance on the policy rate was widely expected as it works towards achieving 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.

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

Inflation trend

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

The central bank projected that gross value added would strengthen to 7.4 per cent in 2017-18 from 6.7 per cent in 2016-17.

However, the central bank said there are upside risks to the baseline projection — the monsoon’s impact on food inflation in the coming year, implementation of the allowances recommended by the Seventh Pay Commission and one-off effects of the Goods and Services Tax.

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

To suck out the excess liquidity, the RBI has raised the reverse repo rate by 25 basis points to 6 per cent. The reverse repo rate is the rate at which the central bank pays banks for parking their surplus funds with it.

Corporates were not enthused by the RBI’s stand on the policy rates. “From the industry’s perspective, greater transmission of previous policy rate cuts and a further softening of the lending rates of banks are important as this would encourage both consumption and investment demand,” said Pankaj Patel, President, FICCI.

RBI Governor Urjit Patel, however, said that “further scope for a more complete transmission of policy impulses remains, including for small savings/administered rates.”

NPA resolution

On stressed assets, Patel said that after completing the Asset Quality Review of banks, and with several other critical ingredients in place, such as the Insolvency and Bankruptcy Code and the Oversight Committee, the RBI has been preparing actively for an orderly resolution of the issue.

“This will be undertaken concomitantly with resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action framework and our new enforcement department, which has started its work this week,” said Patel.

Loan waivers criticised

The RBI said that there was a need for a consensus on the issue of farm loan waivers as this could be seen as undermining honest credit culture. This comment comes in the context of political parties promising waivers to farmers to win polls.

Patel cautioned that such waivers could lead to State governments borrowing more and crowding out private-sector borrowers. “It impacts credit discipline…. waivers engender a moral hazard. It also entails, at the end of the day, transfers from taxpayers to borrowers,” he said.

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Published on April 06, 2017
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