By Ruma Dubey

The message which the RBI Governor today sent across was pretty clear – unless there is transmission of the previous two rate cuts of 25 bps each in 2015, the RBI was not going to act on rate cuts any more. And he was optimistic that banks will be forced to cut rates to match markets. Hopefully, banks will toe the line and instead of cutting only deposit rates, will cut lending rates too!

And this was indeed the most logical thing to do as it makes no sense to cut rates merely at the Central bank level when the national and other banks simply do not act on it. Also, common sense told that there simply could have been no room for a rate cut in current policy after the surprise rate cut in March.  Unseasonal rains and now seasonal factor, which is the summer, will as such push up inflation. Thus while we expect inflation to go up, under these circumstances, a rate cut was simply not possible.

The Governor stated that India was adequately buffered against US Fed rate hike and stated pretty clearly that it would be domestic issues which will guide policy decisions and not US Fed. But yes, like the rest of the world, we will watch the US Fed.

Highlights of the first Credit Policy of FY16:

• To keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.5%
• To keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liability (NDTL)
• To continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through auctions.
• To continue with daily variable rate repos and reverse repos to smooth liquidity.
• This means, the reverse repo rate under the LAF will remain unchanged at 6.5% and the marginal standing facility (MSF) rate and the Bank Rate will stand at 8.5%.
• Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review.
• CPI inflation is projected at its current levels in the first quarter of 2015-16, moderating thereafter to around 4% by August but firming up to reach 5.8% by the end of the year.
• Though there are many upside risks to inflation, they appear to be offset by downsides originating from global deflationary/disinflationary tendencies, the still soft outlook on global commodity prices; and slack in the domestic economy.
• Assuming a normal monsoon, continuation of the cyclical upturn in a supportive policy environment, and no major structural change or supply shocks, output growth for 2015-16 is projected at 7.8%, higher by 30 bps from 7.5% in 2014-15, but with a downward bias to reflect the still subdued indicators of economic activity.
• The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years.

RBI has stated explicitly that future rate cuts will depend on four main factors:

1. RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates.
2. Developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the RBI stays vigilant to any threats to the disinflation that is underway. The Reserve Bank will look through both seasonal as well as base effects.
3. The RBI will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.
4. Finally, the RBI will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past.

Other policy measures:

• To allow financially sound and well managed (FSWM) scheduled urban co-operative banks, which are CBS-enabled and having minimum net worth of Rs.100 crore, to issue credit cards.
• To permit state co-operative banks satisfying certain eligibility criteria to set up off-site ATMs/mobile ATMs without obtaining prior approval from the Reserve Bank.
• To introduce a similar web-based solution for participation of all mid-segment / retail investors having gilt accounts on the e-Kuber platform; to be made available within the next three months.
• In order to tap private savings through G-secs, retail investors/individuals could be provided direct access to both primary and secondary market platforms without any intermediary.
• With a view to encouraging hedging of forex exposures and enhancing the liquidity of the currency options market, it is proposed to permit Indian exporters and importers to write covered options on the basis of actual contracted forex exposure, subject to conditions.
• NBFC-infrastructure debt fund (NBFC-IDF) to provide take-out finance for infrastructure projects that have completed one year of operation in the PPP segment without a tripartite agreement and to the non-PPP segment.
• Giving the time-table for the entire fiscal of ensuing credit policies: the next one is scheduled for 2^nd June, then on 4^th August, next on 29^th Sept, followed by 1^st Dec and the last one of the fiscal on 2^nd Feb’16. Mark these dates.