The Reserve Bank of India (RBI) on Tuesday left the key policy rate unchanged at 6.75 per cent, as widely expected, ahead of the union budget as the central bank will wait for the fiscal road map from the government.
“The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened,” RBI Governor Raghuram Rajan said while announcing the last bi-monthly policy review of this financial year.
The government is targeting a fiscal deficit of 3.9 per cent for the current financial year and 3.5 per cent for FY17.
“RBI gave clear indications that it would like to wait until government’s annual budget announcement, due at the end of February before taking additional measures,” said Abheek Barua, Chief Economist, HDFC Bank.
The central bank has reduced interest rates by 125 bps since January 2015.
The RBI also highlighted that retail inflation, though having evolved along the projected trajectory, could face the risk of upward momentum due to factors like 24 per cent salary hike proposed by the seventh pay commission. RBI has projected five per cent retail inflation by the end of the financial year 2016-17.
Bond yields spiked as market participants interpreted the policy stance as hawkish. However, the governor said, “Broadly, it is not fair to read that we have been more hawkish over time. I think the positives are balanced by the negatives,” Dr. Rajan said.
Yield on the 10-year benchmark government bonds ended six bps higher at 7.85 per cent on Tuesday. Equity markets also fell by about one per cent on Tuesday. However, it was mainly due to global queues and crude oil prices falling again.
While Dr. Rajan reassured, during an interaction with analysts and researchers, that the central bank is still in an accommodative stance, he said the central bank had the option of effecting an inter-meeting rate cut. But such a step is usually taken only in the case of a “great sense” of urgency to signal a change in policy direction.
“We will see what the government does and react accordingly,” Dr. Rajan said when asked if there could be a rate cut after the budget.
Bankers said while the policy was on expected lines, they expected some steps to address liquidity which had been tight.
“On liquidity front, there remains a concern with systemic liquidity deficit well in excess of the prescribed one per cent of net demand and time liabilities currently. With revised Liquidity Coverage Ratio kicking in and deposit growth lagging, RBI may have to be proactive in managing the liquidity deficit through tools available at its disposal,” said Arundhati Bhattacharya, Chairman, State Bank of India.
Going ahead in 2016-17, RBI said growth is expected to strengthen gradually, notwithstanding significant headwinds and projected the gross value added growth for the next fiscal at 7.6 per cent.
Following are the highlights of the RBI’s sixth bi-monthly monetary policy statement
Repo rate unchanged at 6.75 per cent
Cash reserve ratio or CRR unchanged at 4 per cent
Marginal standing facility rate and Bank Rate at 7.75 per cent
Policy to remain accommodative if fiscal side helps
Reforms in Budget to create space for rate cut
Expects FY17 inflation at around 5 per cent
Indian economy is being viewed as a beacon of stability
Pegs FY16 growth at 7.4 pc ; FY17’s at 7.6 pc;
RBI to create a special ecosystem for startup funding
Prospects for the rabi harvest are improving slowly
First bi-monthly monetary policy for 2016-17 on April 5.
