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4
October 2016
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| Urjit patel (The Total Investment & Insurance Solutions) |
In the first monetary policy review
by the newly set up Monetary Policy Committee (MPC) as well as by new Governor
Urjit Patel, the Reserve Bank of India (RBI), on Tuesday cut repo rate (the
short-term lending rate charged by the central bank on borrowings by commercial
banks) by 25 basis points (bps) to 6.25% with immediate effect. The Total Investment
& Insurance Solutions
"The decision of the MPC is
consistent with an accommodative stance of monetary policy in consonance with
the objective of achieving consumer price index (CPI) inflation at 5% by fourth
quarter of 2016-17 and the medium -term target of 4% within a band of plus or
minus 2%, while supporting growth," the RBI said in a release. The Total Investment
& Insurance Solutions
All six members of the panel,
chaired by RBI Governor Urjit Patel, voted in favour of the monetary policy
decisions -- the minutes of which will be released on 18 October 2016. The
decision to cut repo rate is expected to bring much expected relief to
commercial banks and corporates. The Total Investment & Insurance
Solutions
With repo rate reduced to 6.25%, the
reverse repo rate under the liquidity adjustment facility (LAF) will now be
5.75%. Subsequently, the marginal standing facility (MSF) rate and the bank
rate are adjusted to 6.75%. The Total Investment & Insurance
Solutions
Commenting on the RBI's fourth
monetary policy review, Arundhati Bhattacharya, Chairman of State Bank of India
(SBI), the country's largest lender, said, "The Committee decision to cut
Repo rate by 25 bps was on the expected lines. With benign inflation trajectory
going forward, RBI's policy stance is expected to remain accommodative. Banks
will continue to transmit rates based on evolving liquidity scenario." The Total Investment
& Insurance Solutions
Talking about outlook, the central
bank statement says, "The Committee expects that the strong improvement in
sowing, along with supply management measures, will improve the food inflation
outlook. It notes that the sharp drop in inflation reflects a downward shift in
the momentum of food inflation – which holds the key to future inflation
outcomes – rather than merely the statistical effects of a favourable base
effect. The Government has announced several measures to cool food inflation
pressures, especially with regard to pulses. These measures should help in
moderating the momentum of food inflation in the months ahead. This has opened
up space for policy action, as indicated in the third bi-monthly monetary
policy statement. The easy liquidity conditions engendered by the Reserve
Bank’s operations should also enable the smooth transmission of the policy
action through various market segments. Furthermore, banks should find added
impetus for better transmission by the recent downward adjustment in small
savings rates. The Committee took note of potential cost push pressures that
may emerge, including the 7th pay commission award on house rent allowances,
and the increase in minimum wages with possible spill overs through minimum
support prices. The fuller play of these factors will need vigilance to prevent
a generalised cost spiral from taking root."
"On balance, the Committee
envisages a trajectory taking headline CPI inflation towards a central tendency
of 5% by March 2017, with risks tilted to the upside albeit lower than in the
second and third bi-monthly monetary policy statements of June and August
respectively," it added. The Total Investment & Insurance
Solutions
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| CPIinflation (The Total Investment & Insurance Solutions) |
The Reserve Bank expects the
momentum of growth to quicken with a normal monsoon raising agricultural growth
and rural demand, as well as by the stimulus to the urban consumption spending
from the pay commission’s award. It says, "The accommodative stance of
monetary policy and comfortable liquidity conditions should support a revival
of credit to the productive sectors. The continuing sluggishness in world trade
and the smaller terms of trade gains than in the past point, however, are
leading to further slackening of external demand going forward. Accordingly,
the projection of growth of real gross value added (GVA) for 2016-17 is
retained at 7.6%, with risks evenly balanced around it." The Total Investment
& Insurance Solutions
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GVA (The Total Investment & Insurance
Solutions)
VS Parthasarathy, Chief Financial
Officer (CFO) of Mahindra Group, says, "This policy was a window into the
thoughts of the Governor and the MPC. It is not only about the here and now, it
is also about what the MPC thinks about risks and importantly it reveals the
Governor's thoughts on structural matters. The focus will be on non-performing
assetst (NPAs), financial market reforms, and financial inclusion for MSME. The
policy has however stuck to monetary aspects and we have to wait to see the
Governor's actions elsewhere. We trust he would continue to be vigilant,
watching over the economic landscape with flexibility to act as the situation
changes."
According to Anuj Puri, Chairman
& Country Head of JLL India, the first question that arises after this rate
cut is, of course, how it will help improve buyer sentiment in the housing
sector. "The reason why housing sales have been sluggish is because of
trust deficit between consumers and developers. Unless RERA and other
pro-consumer policies come into play, buyers will continue to be wary.
Therefore, we can expect only a marginal improvement in sentiment on the back
of this rate cut. At this point, there is also no ready answer to the question
of to what extent banks will actually pass on the benefit of the rate cut to
borrowers," he added. The Total Investment & Insurance
Solutions
Here are the latest policy rates
following MPC review…
Repo
Rate.......................6.25%
Reverse Repo Rate........5.75%
CRR................................4%
Bank
Rate.......................6.75%
The Total Investment & Insurance
Solutions
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