Urjit Patel says still more scope for banks to cut lending rates

Economists predict the Reserve Bank of India will leave the repurchase rate unchanged at 6.25% on Thursday
Urjit Patel says still more scope for banks to cut lending rates

10 April, 2017

"Consequent upon the narrowing of the LAF corridor, the reverse repo rate under the LAF is at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate are at 6.50 per cent", an RBI policy statement said. "The RBI definitely does not expect CPI (consumer price index) inflation to go below 4% next year and the range of 4.5-5% will be the base on which the monsoon progress impact will hinge on", he added.

The repo rate was last reduced by a quarter-point in October at the first meeting chaired by Governor Patel, before the announcement of demonetization on November 8 a year ago. The move will encourage banks to park their funds with RBI, say analysts. Borrowers lost one of their last hopes for lower rates, as the central bank cited upside risks to inflation in FY18, which economists read as RBI hitting pause button.

"Underlying inflation pressures persist, especially in prices of services", the RBI said in its statement Thursday, reiterating its neutral stance.

Governor Urjit Patel attends a news conference after the bi-monthly monetary policy review in Mumbai, India April 6, 2017.

The lack of transmission has been one of the dominant worries expressed by RBI during the past two years when it was in an accommodative stance.

"We are maintaining status quo on repo rate in April policy", said a state-run State Bank of India report authored by Chief Economic Adviser Soumya Kanti Ghosh.

"Several indicators are pointing to a modest improvement in the macroeconomic outlook".

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Retail inflation for 2017-18 is projected at 4.5 per cent in the first half and 5 per cent in the second half.

With inflationary concerns in mind, the Reserve Bank of India (RBI) on Thursday retained its key lending rate unchanged at 6.25 per cent, and criticised loan waiver promises as a "moral hazard" that entails transfer of taxpayers' money.

The government, mindful of the impact on inflation, has already indicated it is considering acting with the RBI in implementing a special facility to drain the extra liquidity.

"RBI left rates unchanged as the markets had expected".

Noting that excluding food and fuel, inflation has been unyielding at 4.9 percent since September, the RBI said: "The Committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects". Issuances of cash management bills (CMBs) under the market stabilisation scheme (MSS) ceased in mid-January and existing issues matured with the consequent release of liquidity being absorbed primarily through variable rate reverse repo auctions of varying tenors.

Moreover, Gross Value Added growth is projected to be 7.4% in 2017-'18, up from 6.7% the previous financial year, the RBI announced.

But the RBI has long anxious about sudden reversals of foreign flows, after first-hand experience in 2013 when worries about Fed tightening plunged India into its worst currency crisis in more than two decades. "I think, were largely sorted out", said Joseph Zvegllich, director at the Asian Development Bank's macroeconomics research division.

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