AS EXPECTED - RBI MAINTAINS STATUS QUO

By Ruma Dubey

As expected, it was a status-quo Credit Policy. No one had expected a rate cut and the RBI Governor has pretty much indicated the same in June; so no surprises there.

But more than the Monetary Policy, this meet was more about the Monetary Policy Committee (MPC). Speculation has been rife about the Govt planning to set up the much needed MPC but in the process, may end up clipping the wings of the RBI, with Govt getting more power to call the shots.

Putting these talks to rest, the Governor spoke at length about the MPC. He has stated that the Govt and RBI was working closely on formulating the composition of the MPC; he reiterated that there was no conflict there. What this means is that MPC is a reality and is sure to happen. This is a good move – currently all veto power rests with the RBI Governor; he take all the advice he wants and gets but ultimately he alone has the power to decide. And that is what is a drawing a lot of flak, putting such a large decision making on one individual, howsoever able and experienced he/she may be. Alan Greenspan is a great example of some decisions going wrong. So the idea is that monetary policy decisions will be taken by the MPC where voting will be done and decisions will be passed accordingly. This onus on one-man, which many say is prone for failure will thus be removed. What this means is that when MPC gets constituted, surely the current absolute veto power of the Governor could get diluted but we need to wait for the details of the MPC to see if the Govt gets more weightage on the Committee – that will essentially be the death knell of RBI and prudent monetary policy. The Govt has clarified that this will not happen. Also remember, setting up the MPC means a change in the RBI Act; this means it’s a new law, which will need Parliamentary approval. So this MPC is not about to happen overnight and we can wait and debate about the MPC composition when it comes.

Coming back to the Policy, a quick look at the highlights:

• Repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent.
• Cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL).
• To continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions.
• To continue with daily variable rate repos and reverse repos to ensure smooth liquidity.
• The reverse repo rate under the LAF will remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent.
• Banks not passing on enough of the rate cuts to consumers - Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far.
• Inflation projections in this bi-monthly statement are elevated by the higher than expected June observation but reduced by prospects of softer crude prices and a near-normal monsoon thus far. This implies that inflation projections for January-March 2016 are lower by about 0.2 per cent, with risks broadly balanced around the target of 6.0 per cent for January 2016.
• On an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6 per cent.
• The fourth bi-monthly monetary policy statement will be announced on September 29, 2015.

So for the markets as of now, there is no immediate trigger. It will be back to stock specific, result and news based trading. Maybe if the Parliament gets to working and passing at least a few Bills, the market sentiments could be buoyed.