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.At its first bi-monthly Monetary Policy Review of the 2017-18 fiscal, the RBI preferred to maintain status quo on its repurchase (repo) rate, or the short-term lending rate it charges on borrowings by commercial banks, and said it awaited further macroeconomic data before deciding on any changes. After the bank's Monetary Policy Committee (MPC) meeting, RBI Governor Urjit Patel stressed the need to "eschew" loan waiver promises, and termed loan waiver as "a moral hazard", which "can lead to higher cost of borrowing for others." The MPC decided to narrow the policy rate corridor by 25 basis points. The corridor is the difference between the repo and reverse repo rate. A narrow corridor is expected to check money flow into the banking system and to drain out additional liquidity.
The adjustment automatically hiked the reverse repo rate under the liquidity adjustment facility (LAF) to six per cent. Conversely, the apex bank maintained the cash reserve ratio (CRR), or the quantum of liquid funds which commercial banks have to keep, at 4 per cent. "The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," an RBI policy statement said. The RBI said risks are evenly balanced around the inflation trajectory at the current juncture. "There are upside risks to the baseline projection," it said."Inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored. At the same time, the output gap is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory," it added.All six members of the panel, chaired by RBI Governor Urjit Patel, voted in favour of the monetary policy decisions.
At its last policy review in February 8, 2017, while holding rates at 6.25 per cent, the Reserve Bank had changed its policy stance from "accommodative" to "neutral".Expectations that the RBI will maintain status quo on rates had been fuelled by inflation numbers, with wholesale inflation soaring to over a three-year high of 6.55 per cent in February and retail inflation climbing to 3.65 per cent due to rise in food and fuel prices.The RBI hinted that the fallout of demonetisation, whereby the banking system is flushed with liquidity adding to inflationary pressures, could be a factor in its holding rates."With progressive remonetisation, the surplus liquidity in the banking system declined from a peak of Rs 7.96 lakh crore on January 4, 2017, to an average of Rs 6.01 lakh crore in February, and further down to Rs 4.81 lakh crore in March," the RBI said. The higher reverse repo rate will make it lucrative for commercial banks to park their excess funds with the RBI.Referring to the new Uttar Pradesh government's decision to waive farm loans, RBI Governor Patel told reporters here, "There is a need to create consensus so that loan waiver promises are eschewed. It impacts credit culture and discipline. Farm loan waiver undermines the honest credit culture." "It is a moral hazard. It entails transfer of taxpayers' money to private borrowers. It can lead to higher cost of borrowing for others," he added.
The equity markets remained unmoved by the widely expected decision. The barometer 30-scrip sensitive index (Sensex) of the BSE closed on Thursday at 29,927.34 points -- down 46.90 points or 0.16 per cent. The wider 51-scrip Nifty of the National Stock Exchange (NSE) closed the day's trade down 3.20 points or 0.03 per cent at 9,261.95 points. Describing the RBI's decision as being along expected lines, Indian industry, however, lauded the narrowing of of the policy rate corridor. "The GVA growth forecast for 2017-18 has been put at 7.4 per cent, which indicates that recovery is expected to gather pace in the current financial year," industry chamber Ficci President Pankaj Patel said i" a statement here.
"The monetary policy rate corridor has been narrowed. From industry's perspective, greater transmission of previous poli'y rate cuts and a further softening of the lending rates of banks is important as this would encourage both consumption and investment demand" he added."Even as faced with a big challenge of ma"aging excess liquidity following demonetization, the RBI has rightly not really gone overboard and resorted to much feared measures like hike in Cash Reserve while leaving the policy interest rates unchanged is on the expected lines," industry body Assocham said in a statement. "Given the inflation risks highlighted by the MPC, including the monsoon dynamics, increased allowances related to the pay commission, one-off impact of GST and global reflation risks, as well as the assessed trajectory of CPI inflation, the repo rate appears highly likely to be on hold during 2017," said rating agency Icra Group Chief Executive Naresh Takkar."The increase in the reverse repo rate and status quo on the cash reserve ratio are likely to offer relief to banks from the point of view of managing the costs associated with their excess liquidity," he added.