RBI CREDIT POLICY - A PAUSE WHILE THE GUESSING GAME CONTINUES

By Ruma Dubey

As widely expected by one and all, this Credit Policy of RBI was a non-event. There is no change in the rates but the RBI seems to have become hawkish as far as inflation goes.

Rajan has always maintained that we need to move in tandem with the global policies, reducing disparities as we go ahead. And that is what he has done – Europe took a pause too and held on to the rates; Yellen on 15^th June is also expected to stay put.

There are just too many uncertainties at the moment for RBI to do anything – the FOMC meet, the onset of monsoon, rising price of food prices which is seasonal during this time, the impending Brexit. Till monsoon truly sets in, which will not happen till July, the RBI is expected to hold on. The next Policy is scheduled for 9^th August and till then, at this juncture, it would be impossible to take a stance. Two months is a long time when analyzing macro economic factors.

But more important than the policy this time, the big question on everyone’s mind – will the Governor’s second term get an extension after 4^th Sept?

Rajan, in his inimitable style, answered it so well. He said that he had come prepared with a statement, going on to say that he did not want to spoil the fun which the media was having, speculating about his staying back; he also quipped that he was intrigued to read so many letters which he had not written! Then on a serious note, he obviously inferred that does not know till now and said that it would be better to look at the statements made by the FM and PM. So that’s that!

A quick look at the highlights:

• To keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent;
• To keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL).
• To continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.
• The reverse repo rate under the LAF will remain unchanged at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent.
• The Reserve Bank’s latest rounds of forward looking surveys indicate an improvement in the overall business situation, driven by a pick-up in capacity utilisation and in order books – both domestic and external. These developments have improved the expectation of business conditions in the first half of 2016-17.
• Purchasing managers in the services sector indicated slowing new business in May and subdued expectations of future activity.
• Reserve Bank injected liquidity through purchases under open market operations (OMOs) of #8377; 700 billion during April-May.
• The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain. 
• Inflation projections given in the April policy statement are retained, though with an upside bias based on these facts - firming international commodity prices, particularly of crude oil; the implementation of the 7th Central Pay Commission awards which will have to be factored into projections as soon as clarity on implementation emerges; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel.
• On a reassessment of balance of risks, therefore, the GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced.
• More monetary transmission to support the revival of growth continues to be critical
• The third bi-monthly monetary policy statement will be announced on August 9, 2016.