By Ruma Dubey

The MPC and Urjit Patel did what was most logical and probably what was widely expected – a 25 bps rate cut. All the six members voted unanimously for this cut; the score was 6 to 0. So the new Governor has struck the right chord with his first policy – he did not have the charm and charisma of Rajan but surely the chutzpah to bring down the rates.

He has proven all wrong that he was a hawk; in fact he has proved today he is all owl, all wide and all alert to what the market and the overall mood demanded of him. Between August and now, apart from the changes in RBI, what has changed is that uncertainty in terms of food prices and monsoon has dissipated. So probably the inflation risk has moderated with softening of rates in core and food inflation. But once again the big question is whether this rate cut will be transmitted by the banks to the people.

One contradiction here is that in the RBI statement, it has said that headline CPI inflation in 2017-18 could be 100-150 bps above the baseline. The impact on inflation is expected to persist for 6-8 quarters, with the peak effect occurring at around 3-4 quarters following the implementation. So if headline inflation is actually expected to go up, why was this rate cut done? Was it to boost growth, while allowing inflation to play second fiddle or was it to keep the Govt happy?

A quick look at the highlights of the policy:

• Reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect.
• The reverse repo rate under the LAF stands adjusted to 5.75 per cent
• Marginal standing facility (MSF) rate and the Bank Rate is now at 6.75 per cent.
• 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 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.
• The momentum of growth is expected 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.
• The level of foreign exchange reserves rose to US$ 372 billion by September 30, 2016 – an all-time high.
• The continuing sluggishness in world trade and smaller terms of trade gains than in the past point 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 per cent.
• The minutes of the MPC’s meeting will be published on October 18, 2016. The next meeting of the MPC is scheduled on December 6 and 7, 2016 and its resolution will be announced on December 7.

The Press conference post the policy was very different as apart from Urjit Patel, the other MPC members spoke too, showing us that today the MPC is the face of the RBI and not the Governor alone. The Governor was not keen to give too much time to the Press with brevity being the hallmark of this conference.

The overall statement of the policy has a dovish stance and there was nothing, neither in the policy nor in the MPC statement to indicate that there could be another rate cut before the year ends. This rate cut of today keeps in tune with the festive mood and we now can only hope that the banks pass this down to the people, generously.

All eyes will now be back on Q2FY17 numbers, especially on banks to see if NPA scene has improved or deteriorated. Then November will be about US elections. The Q3FY17 numbers could be more interesting as rural demand and festive buying will all show only in this quarter.

For a detailed look into the Policy: https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/MPR_F4A9FF233E5B5453D856849DD52D5F6A4.PDF