RBI POLICY – NO CUT, NO ACTION

By Ruma Dubey

The Govt yesterday cut excise duty on petrol and diesel by Rs.2/litre. The first time this rate was cut since May 2014. This was a clear indication that inflation is now on the radar of the Govt too and it was doing what it could to being down inflation.

That was like a preamble to what the RBI had in store for us today. With the Govt itself putting inflation on its watchlist, RBI which is the watch dog for inflation was obviously expected to do nothing to fuel it further.

So no surprises today – the RBI maintained its status quo and no rate cut was announced while it has most certainly further upped its ante on inflation. But its outlook for the future has turned a bit dovish as of now, mainly on account of rising inflation. It cut the growth for FY18 too by 60 bps. And none of these forecasts for inflation and growth is no different from what most of us expected.

The RBI cut the SLR by 50 bps and this is not expected to have any impact as currently liquidity is not an issue; what is an issue is lack of private investment. RBI expects economic activity to be led by services and it expects growth to accelerate in second half of FY18.

As we have said all along, even if RBI had cut rates by 0.25% it would have served no real purpose as what we require currently is an impetus to demand; there is liquidity but companies are simply not investing or expanding or modernizing. Once the confusion over GST settles and confidence once again comes back, with the help of the Govt only can the growth go up now.

The highlights of the policy:

• To keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0 per cent.
• The reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent.
• SLR cut by 50 bps to 19.5% from 14^th Oct fortnight
• HTM limit to be cut to 19.5%
• 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.
• Real gross value added (GVA) growth slowed significantly in Q1 of 2017-18, cushioned partly by the extensive front-loading of expenditure by the central government.
• The uneven spatial distribution of the monsoon was reflected in the first advance estimates of kharif production by the Ministry of Agriculture, which were below the level of the previous year due to lower area sown under major crops including rice, coarse cereals, pulses, oilseeds, jute and mesta.
• In August, headline inflation was projected at 3% in Q2 and 4.0-4.5% in H2FY18. This is now revised upwards to 4.2 to 4.6%.
• The projection of real GVA growth for 2017-18 has been revised down to 6.7%  from the August 2017 projection of 7.3%.
• Teething problems linked to the GST and bandwidth constraints may get resolved relatively soon, allowing growth to accelerate in H2.
• The MPC remains committed to keeping headline inflation close to 4% on a durable basis.
• In the MPC, Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel were in favour of the monetary policy decision, while Dr. Ravindra H. Dholakia voted for a policy rate reduction of at least 25 basis points – last policy too, he has supported a rate cut.
• The next meeting of the MPC is scheduled on December 5 and 6, 2017.

The RBI has also given some advice on how growth could be accelerated. Apart from recapitalizing PSU banks to ensure uninterrupted credit flow, the RBI says following measures could be undertaken to support growth and achieve a faster closure of the output gap:

• A concerted drive to close the severe infrastructure gap
• Restarting stalled investment projects, particularly in the public sector
• Enhancing ease of doing business, including by further simplification of the GST
• Ensuring faster rollout of the affordable housing program with time-bound single-window clearances
• Rationalisation of excessively high stamp duties by states

Is the Govt listening?